Measuring the gains from trade under monopolistic competition

Robert Feenstra

Canadian Journal of Economics, 2010, vol. 43, issue 1, 1-28

Abstract: Three sources of gains from trade under monopolistic competition are (i) new import varieties available to consumers; (ii) enhanced efficiency as more productive firms begin exporting and less productive firms exit; (iii) reduced markups charged by firms due to import competition. The first source of gains can be measured as new goods in a CES utility function for consumers. We argue that the second source is formally analogous to the producer gain from new goods, with a constant-elasticity transformation curve for the economy. We suggest that the third source of gain can be measured using a translog expenditure function for consumers, which, in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups.

Date: 2010
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Working Paper: Measuring the Gains from Trade under Monopolistic Competition (2009)
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