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

Author

Listed:
  • Reto Foellmi
  • Christian Hepenstrick
  • Josef Zweimüller

Abstract

"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."

Suggested Citation

  • Reto Foellmi & Christian Hepenstrick & Josef Zweimüller, 2010. "Non-homothetic preferences, parallel imports and the extensive margin of international trade," IEW - Working Papers 497, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:497
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
    2. Soojae Moon, 2015. "The Losses from Trade Restrictions: Policy Dynamics with Firm Selection and Endogenous Markup," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 86-110, February.
    3. Hélène Latzer & Florian Mayneris, 2011. "Trade in quality and income distribution: an analysis of the enlarged EU market," Working Papers of BETA 2011-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. repec:eee:inecon:v:110:y:2018:i:c:p:87-102 is not listed on IDEAS
    5. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers P85, FERDI.
    6. Christian Hepenstrick, 2010. "Per-capita incomes and the extensive margin of bilateral trade," IEW - Working Papers 519, Institute for Empirical Research in Economics - University of Zurich.
    7. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
    8. Christian Hepenstrick & Alexander Tarasov, 2015. "Per capita income and the extensive margin of bilateral trade," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1561-1599, November.
    9. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    10. Maria Masood, 2015. "New Evidence on Development and the Diversity of Cultural Imports," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 15012, Institut d'Economie et Econométrie, Université de Genève.
    11. Hélène LATZER & Alexandre SIMONS, 2014. "Income distribution, multi-quality firms and patterns of trade," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

    More about this item

    Keywords

    Heterogenous markups; non-homothetic preferences; parallel imports; extensivenmargin of trade;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F19 - International Economics - - Trade - - - Other

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