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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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jonathan Eaton & Samuel Kortum, 2012. "Putting Ricardo to Work," Journal of Economic Perspectives, American Economic Association, vol. 26(2), pages 65-90, Spring.
    2. José Asturias & Manuel García-Santana & Roberto Ramos, 2016. "Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India," Working Papers 907, Barcelona Graduate School of Economics.
    3. James A. Schmitz, 2012. "New and larger costs of monopoly and tariffs," Staff Report 468, Federal Reserve Bank of Minneapolis.
    4. Wyatt J. Brooks & Pau S. Pujolàs, 2014. "Nonlinear Gravity," Department of Economics Working Papers 2014-15, McMaster University.
    5. Colin J. Hottman & Ryan Monarch, 2018. "Estimating Unequal Gains across U.S. Consumers with Supplier Trade Data," Working Papers 18-04, Center for Economic Studies, U.S. Census Bureau.
    6. repec:eee:inecon:v:108:y:2017:i:c:p:260-273 is not listed on IDEAS
    7. Dinopoulos, Elias & Unel, Bulent, 2013. "A simple model of quality heterogeneity and international trade," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 68-83.
    8. Opp, Marcus M. & Parlour, Christine A. & Walden, Johan, 2014. "Markup cycles, dynamic misallocation, and amplification," Journal of Economic Theory, Elsevier, vol. 154(C), pages 126-161.
    9. Kunal Dasgupta & Jordi Mondria, 2015. "Gains from Trade under Quality Uncertainty," Working Papers tecipa-526, University of Toronto, Department of Economics.
    10. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
    11. repec:cje:issued:v:50:y:2017:i:5:p:1414-1444 is not listed on IDEAS
    12. repec:eee:jcecon:v:45:y:2017:i:3:p:445-455 is not listed on IDEAS
    13. Keith Head & Barbara J. Spencer, 2017. "Oligopoly in international trade: Rise, fall and resurgence," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1414-1444, December.

    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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