Technology, Market Structure and the Gains from Trade

Giammario Impullitti*, Omar Licandro, Pontus Rendahl

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We study the gains from trade in a model with oligopolistic competition, heterogeneous firms and innovation. Our key finding is that a trade-induced increase in market concentration can be an important source of the gains from trade. Foreign competition puts downward pressure on profitability which reduces the equilibrium number of firms, but increases their size. This rise in concentration increases welfare via two channels: increasing returns in production, and a scale effect on innovation. In a calibrated version of the model we show that concentration is a main driver of the gains from trade, mostly via its stimulating effect on innovation – the contribution of increasing returns is small. Moreover, lowering trade costs reduce the inefficiency produced by “reciprocal dumping”, leading to substantial gains. In contrast, the associated reduction in markup dispersion has only a negligible effect.
Original languageEnglish
Article number103557
JournalJournal of International Economics
Volume135
Number of pages24
ISSN0022-1996
DOIs
Publication statusPublished - Mar 2022

Bibliographical note

Epub ahead of print. Published online: 29 December 2021.

Keywords

  • Gains from trade
  • Oligopoly
  • Endogenous markups
  • Market concentration
  • Innovation
  • Heterogeneous firms

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