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The Elusive Pro-Competitive Effects of Trade

Costas Arkolakis (), Arnaud Costinot, Dave Donaldson and Andres Rodriguez-Clare ()

Review of Economic Studies, 2019, vol. 86, issue 1, 46-80

Abstract: We study the gains from trade liberalization in models with monopolistic competition, firm-level heterogeneity, and variable markups. For a large class of demand functions used in the international macro and trade literature, we derive a parsimonious generalization of the welfare formula in Arkolakis et al. (2012). We then use both estimates from micro-level trade data and evidence regarding firm-level pass-through to quantify the implications of this new formula. Within the class of models that we consider, our main finding is that gains from trade liberalization predicted by models with variable markups are equal to, at best, and slightly lower than, at worst, those predicted by models with constant markups. In this sense, pro-competitive effects of trade are elusive.

Keywords: International trade; Monopolistic competition; Variable markups; Pro-competitive effect; Gravity models (search for similar items in EconPapers)
JEL-codes: F12 F14 F15 F60 R3 (search for similar items in EconPapers)
Date: 2019
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