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Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity

  • Robert C. Feenstra

The monopolistic competition model in international trade offers three sources of gains from trade that do not arise in competitive models: expansion in product variety; a pro-competitive reduction in the markups charged by firms; and the self-selection of more efficient firms into exporting. Recent literature on trade with heterogeneous firms has emphasized the third of these effects, and the first two effects are ruled out when using a Pareto distribution for productivity with a support that is unbounded above. The goal of this paper is to restore a role for product variety and pro-competitive gains from trade by using a bounded Pareto distribution for productivity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19833.

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Date of creation: Jan 2014
Date of revision:
Handle: RePEc:nbr:nberwo:19833
Note: ITI
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