Restoring the Product Variety and Pro-Competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity

61 Pages Posted: 25 Jan 2014 Last revised: 12 Mar 2023

See all articles by Robert C. Feenstra

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2014

Abstract

The monopolistic competition model in international trade offers three sources of gains from trade that do not arise in competitive models: expansion in product variety; a pro-competitive reduction in the markups charged by firms; and the self-selection of more efficient firms into exporting. Recent literature on trade with heterogeneous firms has emphasized the third of these effects, and the first two effects are ruled out when using a Pareto distribution for productivity with a support that is unbounded above. The goal of this paper is to restore a role for product variety and pro-competitive gains from trade by using a bounded Pareto distribution for productivity.

Suggested Citation

Feenstra, Robert C., Restoring the Product Variety and Pro-Competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity (January 2014). NBER Working Paper No. w19833, Available at SSRN: https://ssrn.com/abstract=2384292

Robert C. Feenstra (Contact Author)

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