Centre for Finance, Credit and Macroeconomics (CFCM)
   
   
  

CFCM 18/03: Technology, market structure and the gains from trade

Abstract

We study the gains from trade in an economy with oligopolistic competition, firm heterogeneity, and innovation. Oligopolistic competition together with free entry make markups responsive to firm productivity and trade costs. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers.  Nevertheless, the downward pressure dominates and the average markup declines, deterring firms from entering the market and leading to higher market concentration.  Neither the increased concentration nor the incomplete pass-through of trade costs to export markups are strong enough to compensate for the increase in competition on domestic sales.  Thus the overall effect of trade on markups is pro-competitive and a key source of the associated welfare gains.  In addition to markups, selection and innovation provide additional channels through which the trade-induced effect on competition impacts welfare.  In a quantitative exercise, we decompose the total gains from trade into these three contributing channels; we find that innovation plays a small but non-negligible role, while the main component is equally split between the pro-competitive and the selection channel.


Download the PDF of this paper

Authors

Giammario Impullitti, Omar Licandro and Pontus Rendahl  

 


View all CFCM discussion papers | View all School of Economics featured discussion papers

 

Posted on Thursday 1st February 2018

Centre for Finance, Credit and Macroeconomics

Sir Clive Granger Building
University of Nottingham
University Park
Nottingham, NG7 2RD

+44 (0)115 951 5620