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Measuring the gains from trade under monopolistic competition

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  • Robert C. Feenstra
Abstract
Three sources of gains from trade under monopolistic competition are (i) new import varieties available to consumers; (ii) enhanced efficiency as more productive firms begin exporting and less productive firms exit; (iii) reduced markups charged by firms due to import competition. The first source of gains can be measured as new goods in a CES utility function for consumers. We argue that the second source is formally analogous to the producer gain from new goods, with a constant-elasticity transformation curve for the economy. We suggest that the third source of gain can be measured using a translog expenditure function for consumers, which, in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups.

Suggested Citation

  • Robert C. Feenstra, 2010. "Measuring the gains from trade under monopolistic competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 1-28, February.
    • Handle: RePEc:cje:issued:v:43:y:2010:i:1:p:1-28
    DOI: 10.1111/j.1540-5982.2009.01577.x
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    JEL classification:

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

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