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Effects of the Degree of Firm Heterogeneity on the Number of Firms and International Trade under Monopolistic Competition

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  • Nguyen HIEP
  • Hiroshi OHTA

Abstract

This paper examines the effects of the degree of firm heterogeneity on the number of firms and of the difference in this degree between countries on international trade. The change in the mass of firms, trade pattern and welfare effect of trade are examined in a general equilibrium model where firms with different productivity levels in two countries having different degrees of firm heterogeneity in productivity compete in a monopolistically competitive market of a differentiated good. The paper reveals that the number of firms in a country always inversely relates to the degree of firm heterogeneity of its own, both in autarky and under free trade. In contrast, when firms in a country become less (more) heterogeneous, the number of firms in this country's trading partner will decrease (increase). Two countries with different extents of firm heterogeneity will benefit from trade at an equilibrium where the country with less heterogeneous firms has more firms and is the net-exporter in the intra-industry trade of the differentiated good. This paper contributes to the analysis of the effect of asymmetry between countries at firm level on the industrial reallocation and international trade with firm heterogeneity.

Suggested Citation

  • Nguyen HIEP & Hiroshi OHTA, 2006. "Effects of the Degree of Firm Heterogeneity on the Number of Firms and International Trade under Monopolistic Competition," GSICS Working Paper Series 13, Graduate School of International Cooperation Studies, Kobe University.
    • Handle: RePEc:kcs:wpaper:13
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    File URL: https://da.lib.kobe-u.ac.jp/da/kernel/80600013/
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    References listed on IDEAS

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    1. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 31-66.
    2. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    3. Catia Montagna, 2001. "Efficiency Gaps, Love of Variety and International Trade," Economica, London School of Economics and Political Science, vol. 68(269), pages 27-44, February.
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    More about this item

    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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