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Structural Gravity and the Gains from Trade under Imperfect Competition: Quantifying the Effects of the European Single Market

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  • Benedikt Heid
  • Frank Stähler

Abstract

The structural gravity model is the workhorse model in international trade to estimate the drivers of trade costs. We propose a new gravity estimation procedure that allows us to disentangle exogenous trade costs and endogenous aggregate markups under oligopoly. Our method can be easily implemented in standard gravity data sets, and we illustrate it by analyzing the competition and welfare effects of the European Single Market. We find that abolishing the European Single Market would increase domestic aggregate markups in EU member countries by 2 to 6 percent. Welfare effects of trade liberalization are larger due to changes in competition among domestic and foreign firms. Our findings highlight that evaluations of trade policy changes and trade cost reductions should also consider their effects on competition.

Suggested Citation

  • Benedikt Heid & Frank Stähler, 2020. "Structural Gravity and the Gains from Trade under Imperfect Competition: Quantifying the Effects of the European Single Market," CESifo Working Paper Series 8121, CESifo.
    • Handle: RePEc:ces:ceswps:_8121
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    Keywords

    trade; gravity; imperfect competition; market power; oligopoly; European single market; European Union;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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