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The Microeconomics of New Trade Models

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  • Alfaro, Martin

    (University of Alberta, Department of Economics)

Abstract

I provide a uni ed framework to analyze models of monopolistic competition with firm heterogeneity a la Melitz under standard demands and any productivity distribution. By using this methodology, I disentangle the effects of trade liberalizations on the domestic market in terms of new export opportunities and tougher import competition. I show that while the former entails pro-competitive effects, contrary to what might be expected, tougher import competition has no impact on either domestic firms' prices, quantities or their survival productivity cutoff; it only affects the mass of domestic incumbents. The results applied to the case of two big economies imply that a unilateral liberalization only entails worse export conditions for the liberalizing country, thus explaining the Metzler paradox found under this setup. In a model in which firms have knowledge of their productivity and are heterogeneous, I show that the disciplinary effects from the import-competition channel are reactivated.

Suggested Citation

  • Alfaro, Martin, 2019. "The Microeconomics of New Trade Models," Working Papers 2019-2, University of Alberta, Department of Economics.
  • Handle: RePEc:ris:albaec:2019_002
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    Cited by:

    1. 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.
    2. Paolo Bertoletti & Federico Etro, 2024. "Insufficient Entry in Monopolistic Competition," Working Papers 543, University of Milano-Bicocca, Department of Economics.

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    More about this item

    Keywords

    monopolistic competition; Melitz model; import competition; export opportunities; trade liberalization;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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