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Market size, income heterogeneity, and trade

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  • Kichko, Sergei
  • Picard, Pierre M.

Abstract

This paper studies the effects of market enlargement in the context of monopolistic competition, variable markups, and income heterogeneity. Market enlargement increases product diversity and entices firms to reduce prices and markups due to pro-competitive effects. It benefits all individuals but more high-income ones. The strength of the market enlargement effect is independent of income inequality for Pollak’s (1971) preferences. In an open economy, the market enlargement of one country reduces prices globally while it fosters firm entry in this country and exit in the other country. Welfare gains are also larger for higher-income groups. A calibration exercise suggests that effects on market outcome and welfare gains are sizable.

Suggested Citation

  • Kichko, Sergei & Picard, Pierre M., 2024. "Market size, income heterogeneity, and trade," Economics Letters, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000107
    DOI: 10.1016/j.econlet.2024.111526
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    More about this item

    Keywords

    Monopolistic competition; Additive preferences; Income inequality; Pro-competitive effects; Welfare; Trade;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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