Effects of the Degree of Firm Heterogeneity on the Number of Firms and International Trade under Monopolistic Competition

Hiep Nguyen and Hiroshi Ohta

No 13, GSICS Working Paper Series from Graduate School of International Cooperation Studies, Kobe University

Abstract: This paper examines the effects of the degree of firm heterogeneity on the number of firms and of the difference in this degree between countries on international trade. The change in the mass of firms, trade pattern and welfare effect of trade are examined in a general equilibrium model where firms with different productivity levels in two countries having different degrees of firm heterogeneity in productivity compete in a monopolistically competitive market of a differentiated good. The paper reveals that the number of firms in a country always inversely relates to the degree of firm heterogeneity of its own, both in autarky and under free trade. In contrast, when firms in a country become less (more) heterogeneous, the number of firms in this country's trading partner will decrease (increase). Two countries with different extents of firm heterogeneity will benefit from trade at an equilibrium where the country with less heterogeneous firms has more firms and is the net-exporter in the intra-industry trade of the differentiated good. This paper contributes to the analysis of the effect of asymmetry between countries at firm level on the industrial reallocation and international trade with firm heterogeneity.

Keywords: firm heterogeneity; international trade; monopolistic competition; intra-industry trade; number of firms. (search for similar items in EconPapers)
JEL-codes: D21 D43 F12 L11 L13 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2006-12
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Persistent link: https://EconPapers.repec.org/RePEc:kcs:wpaper:13

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