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Gains from trade and efficiency under monopolistic competition: a variable elasticity case

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  • BEHRENS, Kristian
  • MURATA, Yasusada

Abstract

We present a general equilibrium model of monopolistic competition with variable demand elasticities and investigate the impact of free trade on welfare and efficiency. First, contrary to the constant elasticity case, in which all gains from trade are due to increasing product diversity, our model features gains from pro-competitive effects. Second, we prove that the market outcome is not efficient because too many firms operate at an inefficiently small scale. Last, we illustrate that free trade raises efficiency by reducing the gap between the equilibrium utility and the optimal utility.

Suggested Citation

  • BEHRENS, Kristian & MURATA, Yasusada, 2006. "Gains from trade and efficiency under monopolistic competition: a variable elasticity case," LIDAM Discussion Papers CORE 2006049, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2006049
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    References listed on IDEAS

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    19. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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    Cited by:

    1. Behrens, Kristian & Murata, Yasusada, 2012. "Trade, competition, and efficiency," Journal of International Economics, Elsevier, vol. 87(1), pages 1-17.
    2. repec:spo:wpecon:info:hdl:2441/7348 is not listed on IDEAS
    3. Robbert Maseland, 2014. "Does Germany have an East-West Problem? Regional Growth Patterns in Germany since Reunification," Regional Studies, Taylor & Francis Journals, vol. 48(7), pages 1161-1175, July.
    4. Kristian Behrens & Yasusada Murata, 2011. "Trade, Competition, and Efficiency (revised version)," Cahiers de recherche 1118, CIRPEE.
    5. repec:hal:spmain:info:hdl:2441/7348 is not listed on IDEAS
    6. Sylvain Barde, 2008. "A Generalized Variable Elasticity of Substitution Model of New Economic Geography," Working Papers hal-01066187, HAL.
    7. repec:hal:wpspec:info:hdl:2441/7348 is not listed on IDEAS
    8. repec:spo:wpmain:info:hdl:2441/7348 is not listed on IDEAS

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    More about this item

    Keywords

    international trade; monopolistic competition; variable elasticity; gains from trade; efficiency.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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