Efficient Imperfect Competition with an Application to International Trade

Guido Menzio

No 33253, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I study the equilibrium and the welfare effects of international trade when product markets are imperfectly competitive due of search frictions—as in Burdett and Judd (1983)—rather than product differentiation—as in Dixit and Stiglitz (1977). Markups are positive, even though there are multiple firms producing identical goods. Markups depend negatively on the number of firms producing identical goods, which, in turn, determines the extent of competition in the market. Markups may be increasing, constant, decreasing or non-monotonic in firm's size, depending on the extent of competition and on the distribution of marginal costs. The entry of firms and the quantity of output produced by each firm are efficient, even though the market is imperfectly competitive. International trade increases the measure of firms in the market, intensifies competition, lowers markups, and unambiguously increases welfare. These "natural" effects of trade emerge generically in the Burdett-Judd model of imperfect competition. In the Dixit-Stiglitz model of imperfect competition, these effects are an artifact of particular specifications of preferences.

JEL-codes: D43 D83 F12 L16 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-com, nep-ind, nep-int and nep-mic
Note: EFG
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