Entry, Size Expansion, and Gains from Trade with Heterogeneous Firms

Abstract

This paper presents a simple model of monopolistic competition that features a general class of additively separable preferences without any fixed costs. While trade always crowds out less productive firms as long as countries are symmetric, we show that the impact is independent of entry/exit a la Hopenhayn, and is different from the effect of market size expansion, which may crowd in less productive firms. Our analysis pin-points the source of gains from trade in the presence of heterogeneous firms as bringing about new varieties from foreign countries by expanding more productive firms at home.

Keywords: Firm heterogeneity, International trade, Entry, Market expansion

JEL Classification: F10, F12, F14