Trade and industrial structure with large firms and heterogeneity
Eddy Bekkers () and
No 20121201, IIDE Discussion Papers from Institue for International and Development Economics
We develop a model of trade and firm heterogeneity in an oligopolistic setting. This setting generates key differences in terms of modelling setup, modelling predictions and welfare implications with respect to the existing literature on trade and firm heterogeneity. In terms of modelling setup our approach allows us to explore interaction between potentially large heterogeneous firms, in contrast to recent trade literature with heterogeneity and atom- istic firms. We offer a solution for the integer problem inherent in small group models, based on stochastic dominance. The model generates testable predictions deviating from the bench- mark firm heterogeneity model of Melitz (2003) in terms of the effect of trade liberalization on markups, market shares, the market price. We also derive predictions on the effect of distance and market size on the probability of zero trade flows and export prices. Our model features the possibility that welfare declines as a result of trade liberalization. The result in Brander and Krugman (1983), the benchmark model for trade under oligopoly, that welfare unambigu- ously rises with free entry and might decline without free entry due to increased cross-hauling is reversed. In a setting with heterogeneous instead of homogeneous firms, welfare might decline with free entry. A negative welfare effect without free entry can be ruled out if the firm size distribution is sufficiently dispersed.
Keywords: Endogenous market structure; Firm heterogeneity; Oligopoly and trade; Welfare effects of trade liberalization (search for similar items in EconPapers)
JEL-codes: L11 L13 F12 (search for similar items in EconPapers)
Pages: 43 pages
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Journal Article: Trade and industrial structure with large firms and heterogeneity (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:lnz:wpaper:20121201
Access Statistics for this paper
More papers in IIDE Discussion Papers from Institue for International and Development Economics Contact information at EDIRC.
Bibliographic data for series maintained by iide webmaster ( this e-mail address is bad, please contact ).