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Structural Gravity and the Gains from Trade under Imperfect Competition

Benedikt Heid () and Frank Stähler ()

No 8121, CESifo Working Paper Series from CESifo

Abstract: We extend structural gravity models of bilateral trade flows to oligopolistic competition. We show that conventional gravity estimates do not only reflect trade costs but also market power. Our simple estimation procedure generalizes the standard gravity model and disentangles exogenous trade frictions and endogenous market power distortions. We use our estimated model to counterfactually increase trade costs by abolishing the European Single Market. We find that domestic firms’ markups in EU member countries increase by 2 to 6 percent. Importantly, welfare effects of trade liberalization are much more pronounced due to the change in competition among domestic and foreign firms.

Keywords: trade; structural gravity; imperfect competition; market power (search for similar items in EconPapers)
JEL-codes: F10 F12 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-com, nep-int and nep-ore
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