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Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade

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  • Thomas J. Holmes
  • Wen-Tai Hsu
  • Sanghoon Lee

Abstract

This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.

Suggested Citation

  • Thomas J. Holmes & Wen-Tai Hsu & Sanghoon Lee, 2013. "Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade," NBER Working Papers 19273, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19273
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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F10 - International Economics - - Trade - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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