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Trade liberalization with granular firms

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  • Alfaro, Martin
  • Warzynski, Frederic

Abstract

Relying on rich firm-product Danish data, we document that the bulk of manufacturing revenue comes from industries where large firms and numerous insignificant firms coexist. Given the importance of this market structure in the aggregate, we study its implications for gains of trade by embedding a set of oligopolistic firms into a monopolistic-competition model. In this setting, the idiosyncratic features of large firms become crucial for gains of trade, given the granular importance of their profits for aggregate income. In particular, gains of trade are negatively affected when a large firm has a pronounced home bias, since trade liberalization reduces its profit by increasing domestic competition. A calibration for Denmark reflects this feature: trade liberalization raises the profits of almost all large firms, but the fall in profit of one large firm almost completely offsets the gains in income from the profit channel.

Suggested Citation

  • Alfaro, Martin & Warzynski, Frederic, 2021. "Trade liberalization with granular firms," Economic Modelling, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:ecmode:v:105:y:2021:i:c:s026499932100239x
    DOI: 10.1016/j.econmod.2021.105650
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    3. Kenji Fujiwara, 2024. "Firm heterogeneity in competition among the big and the small," Bulletin of Economic Research, Wiley Blackwell, vol. 76(1), pages 147-166, January.
    4. Martin Alfaro & Frederic Warzynski, 2022. "Export conditions in small countries and their effects on domestic markets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1894-1928, November.
    5. Sèna Kimm Gnangnon, 2023. "Trade costs and tax transition reform in developing countries," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(4), pages 941-977, October.

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    More about this item

    Keywords

    Granularity; Leaders; Oligopolistic firms; Firm heterogeneity; Gains of trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F10 - International Economics - - Trade - - - General

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