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Non-homothetic preferences, parallel imports and the extensive margin of international trade

  • Föllmi, Reto

    ()

  • Hepenstrick, Christian

    ()

  • Zweimüller, Josef

    ()

We study international trade in a model where consumers have non-homothetic preferences and where household income restricts the extensive margin of consumption. In equilibrium, monopolistic producers set high (low) prices in rich (poor) countries but a threat of parallel trade restricts the scope of price discrimination between countries. The threat of parallel trade allows differences in per capita incomes to have a strong impact on the extensive margin of trade, whereas differences in population sizes have a weaker effect. We also show that the welfare gains from trade liberalization are biased towards rich countries. We extend our model to more than two countries; to unequal incomes within countries; and to more general specifications of non-homothetic preferences. Our basic results are robust to these extensions.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1122.pdf
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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1122.

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Length: 43 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:usg:econwp:2011:22
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