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Trade Policies, Firm Heterogeneity, and Variable Markups

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  • Svetlana Demidova

Abstract

We study unilateral trade liberalization in the model with variable markups. First, we show that the effect of falling per unit trade costs depends on the use of the outside good assumption: in its presence trade liberalization reduces welfare at home, and raises it otherwise. Second, we derive the optimal values of import tariffs for the large and small economies and show that in both cases protection is a desirable policy. Finally, we demonstrate that compared to the models with constant markups, variable markups in our setting result in negative pro-competitive effects, reducing gains from trade.

Suggested Citation

  • Svetlana Demidova, 2015. "Trade Policies, Firm Heterogeneity, and Variable Markups," Department of Economics Working Papers 2015-04, McMaster University.
  • Handle: RePEc:mcm:deptwp:2015-04
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2015-04.pdf
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    References listed on IDEAS

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    1. Feenstra, Robert C., 2018. "Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity," Journal of International Economics, Elsevier, vol. 110(C), pages 16-27.
    2. Swati Dhingra & John Morrow, 2012. "The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition," FIW Working Paper series 088, FIW.
    3. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2013. "The simple analytics of the Melitz model in a small economy," Journal of International Economics, Elsevier, vol. 90(2), pages 266-272.
    4. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
    5. 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.
    6. Gabriel Felbermayr & Benjamin Jung, 2012. "Unilateral Trade Liberalization in the Melitz Model: A Note," Economics Bulletin, AccessEcon, vol. 32(2), pages 1724-1730.
    7. Cole, Matthew T. & Davies, Ronald B., 2011. "Strategic tariffs, tariff jumping, and heterogeneous firms," European Economic Review, Elsevier, vol. 55(4), pages 480-496, May.
    8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    9. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2015. "The Elusive Pro-Competitive Effects of Trade," NBER Working Papers 21370, National Bureau of Economic Research, Inc.
    10. Svetlana Demidova, 2008. "Productivity Improvements And Falling Trade Costs: Boon Or Bane?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1437-1462, November.
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    Cited by:

    1. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    2. Emanuel Ornelas, 2016. "Special and Differential Treatment for Developing Countries," CESifo Working Paper Series 5823, CESifo Group Munich.
    3. Takatsuka, Hajime & Zeng, Dao-Zhi, 2016. "Nontariff protection without an outside good," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 65-78.

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