Market size, income heterogeneity, and trade

Sergey Kichko and Pierre Picard

Economics Letters, 2024, vol. 235, issue C

Abstract: This paper studies the effects of market enlargement in the context of monopolistic competition, variable markups, and income heterogeneity. Market enlargement increases product diversity and entices firms to reduce prices and markups due to pro-competitive effects. It benefits all individuals but more high-income ones. The strength of the market enlargement effect is independent of income inequality for Pollak’s (1971) preferences. In an open economy, the market enlargement of one country reduces prices globally while it fosters firm entry in this country and exit in the other country. Welfare gains are also larger for higher-income groups. A calibration exercise suggests that effects on market outcome and welfare gains are sizable.

Keywords: Monopolistic competition; Additive preferences; Income inequality; Pro-competitive effects; Welfare; Trade (search for similar items in EconPapers)
JEL-codes: D43 F12 F14 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Market size, income heterogeneity, and trade (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000107

DOI: 10.1016/j.econlet.2024.111526

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