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Trade and industrial structure with large firms and heterogeneity

Author

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  • Eddy Bekkers

    (Johannes Kepler University Linz)

  • Joseph Francois

    (CEPR and Johannes Kepler University Linz)

Abstract

We develop a model of trade and firm heterogeneity in an oligopolistic setting. This setting generates key differences in terms of modelling setup, modelling predictions and welfare implications with respect to the existing literature on trade and firm heterogeneity. In terms of modelling setup our approach allows us to explore interaction between potentially large heterogeneous firms, in contrast to recent trade literature with heterogeneity and atom- istic firms. We offer a solution for the integer problem inherent in small group models, based on stochastic dominance. The model generates testable predictions deviating from the bench- mark firm heterogeneity model of Melitz (2003) in terms of the effect of trade liberalization on markups, market shares, the market price. We also derive predictions on the effect of distance and market size on the probability of zero trade flows and export prices. Our model features the possibility that welfare declines as a result of trade liberalization. The result in Brander and Krugman (1983), the benchmark model for trade under oligopoly, that welfare unambigu- ously rises with free entry and might decline without free entry due to increased cross-hauling is reversed. In a setting with heterogeneous instead of homogeneous firms, welfare might decline with free entry. A negative welfare effect without free entry can be ruled out if the firm size distribution is sufficiently dispersed.

Suggested Citation

  • Eddy Bekkers & Joseph Francois, 2012. "Trade and industrial structure with large firms and heterogeneity," IIDE Discussion Papers 20121201, Institue for International and Development Economics.
  • Handle: RePEc:lnz:wpaper:20121201
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    References listed on IDEAS

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    Cited by:

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    4. Morasch, Karl, 2018. "Entering a foreign market: Exports, FDI or strategic alliance?," Working Papers in Economics 2018,5, Bundeswehr University Munich, Economic Research Group.

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    More about this item

    Keywords

    Endogenous market structure; Firm heterogeneity; Oligopoly and trade; Welfare effects of trade liberalization;
    All these keywords.

    JEL classification:

    • 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
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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