Structural Gravity and the Gains from Trade under Imperfect Competition: Quantifying the Effects of the European Single Market

Benedikt Heid and Frank Stähler

No 8121, CESifo Working Paper Series from CESifo

Abstract: The structural gravity model is the workhorse model in international trade to estimate the drivers of trade costs. We propose a new gravity estimation procedure that allows us to disentangle exogenous trade costs and endogenous aggregate markups under oligopoly. Our method can be easily implemented in standard gravity data sets, and we illustrate it by analyzing the competition and welfare effects of the European Single Market. We find that abolishing the European Single Market would increase domestic aggregate markups in EU member countries by 2 to 6 percent. Welfare effects of trade liberalization are larger due to changes in competition among domestic and foreign firms. Our findings highlight that evaluations of trade policy changes and trade cost reductions should also consider their effects on competition.

Keywords: trade; gravity; imperfect competition; market power; oligopoly; European single market; European Union (search for similar items in EconPapers)
JEL-codes: F10 F12 F14 F15 F17 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-com, nep-int and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8121

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