Allocative efficiency, mark-ups, and the welfare gains from trade

Abstract

This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.

Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity

“…Specializing to the case of Bertrand competition between firms, De Blas and Russ (2012) contrast the results obtained by Bernard, Eaton, Jensen, and Kortum (2003) using an infinite number of rivals to those obtained instead with a finite number of rivals; only in the latter case does a pro-competitive effect of trade operate. Our paper is most closely related to Holmes, Hsu and Lee (2013), who also use Bertrand competition and show that if and only if the distribution of productivities is unbounded Pareto, then trade leads to gains only through selection and not through markups. In these papers,…”

Idea Flows, Economic Growth, and Trade

“…We build on previous work on both trade and growth. We consider both perfect competitive setups from Eaton and Kortum (2002) and Alvarez and Lucas (2007), and the case with Bertrand competition as in (Bernard et al, 2003), Arkolakis et al (2012), Holmes et al (2012). We differ from these papers in that we allow for a more general distribution of productivities.…”

The Elusive Pro-Competitive Effects of Trade

“…Bhagwati (1971). A number of recent papers have revisited that idea, either analytically or quantitatively, using variations and extensions of models with firm-level heterogeneity and monopolistic competition, as in Epifani and Gancia (2011), Dhingra and Morrow (2012), and Mrazova and Neary (2013a), Bertrand competition, as in de Blas and Russ (2015) and Holmes, Hsu, and Lee (2015), and Cournot competition, as in Edmond, Midrigan, and Xu (2015). Our approach differs from existing work in three important ways.…”