Procompetitive Losses from Trade

31 Pages Posted: 27 Jul 2007

See all articles by Paolo Epifani

Paolo Epifani

Bocconi University - Department of Economics

Gino Gancia

Queen Mary University of London; Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI)

Date Written: June 2007

Abstract

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence that trade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.

Keywords: Markups, Dispersion of Market Power, Procompetitive Effect, Trade, Welfare

JEL Classification: F12, F15

Suggested Citation

Epifani, Paolo and Gancia, Gino, Procompetitive Losses from Trade (June 2007). Available at SSRN: https://ssrn.com/abstract=1003336 or http://dx.doi.org/10.2139/ssrn.1003336

Paolo Epifani

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Gino Gancia (Contact Author)

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain