Recent monopolistic competition models have identified three main sources of the gains from trade: (1) the introduction of new varieties for consumers, (2) an improvement in efficiency through the exit of low-productivity firms, and (3) a reduction in firms' markups through import competition. In this paper, we extend Feenstra (Economics Letters, 78 (1): [79][80][81][82][83][84][85][86] 2003) to develop a model with producers heterogeneous in productivity to capture these gains. Here, firm markups are decreasing with market share, and trade introduces new varieties to consumers and reduces the market share of domestic firms. This reduces markups and profits and forces low-productivity firms to exit. This pro-competitive effect on the distribution of productivity contrasts with the conventional export-driven mechanism in a constant elasticity setup. We can usefully extend this model for further study because of the homotheticity of the utility function and the tractability of the model.

I embed the H-O framework with heterogeneous producers and their dynamic entry, exit and export decisions while the market structure is endogenous. Because of the endogenous market structure, contrary to the conventional export-driven mechanism, the competition elevates aggregate productivity through reallocating factors and changing producers' entry and exit decisions and therefore trade can have profound impact on those variables in import-competing instead of exporting sectors, which more accurately accords with intuitions and empirical observations. Besides, that H-O model with homogeneous producers and perfect competition is an isomorph, actually a special case, of this model, delivers the possibility for further extensions and test the implications by adapting theoretical and empirical tools based on traditional H-O model.