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Painful Birth of Trade Under Classical Monopolistic Competition

Author

Listed:
  • Igor Bykadorov

    (National Research University Higher School of Economics)

  • Andrea Ellero

    (Ca Foscari University of Venice - Department of Management)

  • Stefania Funari

    (Ca Foscari University of Venice - Department of Management)

  • Sergey Kokovin

    (National Research University Higher School of Economics)

  • Pavel Molchanov

    (National Research University Higher School of Economics)

Abstract

In the standard Krugman (1979) non-CES trade model, several asymmetric countries typically lose from increasing trade costs. However, all countries transiently benefit from such increase at the moment of closing trade, under almost-prohibitive trade costs (i.e., near autarky, which is possible only under non-CES preferences). In other words, during trade liberalization the first step from autarky to trade is necessarily harmful. Our explanation rests on market distortion and business destruction effects.

Suggested Citation

  • Igor Bykadorov & Andrea Ellero & Stefania Funari & Sergey Kokovin & Pavel Molchanov, 2016. "Painful Birth of Trade Under Classical Monopolistic Competition," HSE Working papers WP BRP 132/EC/2016, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:132/ec/2016
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    File URL: https://www.hse.ru/data/2016/04/06/1127112143/132EC2016.pdf
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    References listed on IDEAS

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    4. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques‐François Thisse, 2012. "Monopolistic Competition: Beyond the Constant Elasticity of Substitution," Econometrica, Econometric Society, vol. 80(6), pages 2765-2784, November.
    5. Bykadorov, Igor & Gorn, Alexey & Kokovin, Sergey & Zhelobodko, Evgeny, 2015. "Why are losses from trade unlikely?," Economics Letters, Elsevier, vol. 129(C), pages 35-38.
    6. Swati Dhingra, 2013. "Trading Away Wide Brands for Cheap Brands," American Economic Review, American Economic Association, vol. 103(6), pages 2554-2584, October.
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    11. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2019. "The Elusive Pro-Competitive Effects of Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 46-80.
    12. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
    13. Igor Bykadorov & Andrea Ellero & Stefania Funari & Sergey Kokovin & Pavel Molchanov, 2015. "Pro-competitive effects and harmful trade liberalization in multi-country world," Working Papers 6, Department of Management, Università Ca' Foscari Venezia.
    14. Behrens, Kristian & Murata, Yasusada, 2007. "General equilibrium models of monopolistic competition: A new approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 776-787, September.
    15. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
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    Cited by:

    1. Heiland, Inga & Kohler, Wilhelm, 2022. "Heterogeneous workers, trade, and migration," European Economic Review, Elsevier, vol. 144(C).
    2. Kokovin, Sergey & Molchanov, Pavel & Bykadorov, Igor, 2022. "Increasing returns, monopolistic competition, and international trade: Revisiting gains from trade," Journal of International Economics, Elsevier, vol. 137(C).
    3. Dao‐Zhi Zeng & Shin‐Kun Peng, 2021. "Symmetric tax competition and welfare with footloose capital," Journal of Regional Science, Wiley Blackwell, vol. 61(2), pages 472-491, March.

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    More about this item

    Keywords

    Trade gains; monopolistic competition; variable elasticity of substitution; free trade; autarky.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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