Endogenous Market Structures and International Trade: Theory and Evidence

Federico Etro ()

Scandinavian Journal of Economics, 2015, vol. 117, issue 3, 918-956

Abstract: Under constant elasticity of substitution (CES) preferences and Cournot (or Bertrand) competition, a larger market induces exits of domestic firms, lower prices, and larger production of surviving firms because of competition from more foreign firms, even without resorting to the selection effects of Melitz. The elasticity of the number of firms to population decreases with substitutability between goods, and it reaches 0.5 under Cournot competition with homogeneous goods: empirical evidence supports this structural relation against the unitary elasticity of monopolistic competition. The results hold also in a 2 × 2 × 2 Heckscher–Ohlin model with imperfect competition generating inter- and intra-industry trade due to comparative advantage or comparative preferences.

Date: 2015
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