Trade, competition, and efficiency

Kristian Behrens () and Yasusada Murata

Journal of International Economics, 2012, vol. 87, issue 1, 1-17

Abstract: We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competitive effects. We show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging too high markups. We further illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility. As the population gets arbitrarily large in the integrated economy, the equilibrium utility converges to the optimal utility because of the competitive limit. We finally extend the variable elasticity model to a multi-sector setting, and show that intersectoral distortions are eliminated in the limit. The multi-sector model allows us to illustrate some new aspects arising from intersectoral and intrasectoral allocations, namely that trade leads to structural convergence, rather than sectoral specialization, and that trade induces domestic exit in the nontraded sector.

Keywords: Pro-competitive effects; Competitive limit; Excess entry; Trade and efficiency; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: D43 D51 F12 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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Working Paper: Trade, Competition, and Efficiency (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:87:y:2012:i:1:p:1-17

DOI: 10.1016/j.jinteco.2011.11.005

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