[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/not/notcfc/18-03.html
   My bibliography  Save this paper

Technology, market structure and the gains from trade

Author

Listed:
  • Giammario Impullitti
  • Omar Licandro
  • Pontus Rendahl
Abstract
We study the gains from trade in an economy with oligopolistic competition, firm heterogeneity, and innovation. Oligopolistic competition together with free entry make markups responsive to firm productivity and trade costs. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers. Nevertheless, the downward pressure dominates and the average markup declines, deterring firms from entering the market and leading to higher market concentration. Neither the increased concentration nor the incomplete pass-through of trade costs to export markups are strong enough to compensate for the increase in competition on domestic sales. Thus the overall effect of trade on markups is pro-competitive and a key source of the associated welfare gains. In addition to markups, selection and innovation provide additional channels through which the trade-induced effect on competition impacts welfare. In a quantitative exercise, we decompose the total gains from trade into these three contributing channels; we find that innovation plays a small but non-negligible role, while the main component is equally split between the pro-competitive and the selection channel.

Suggested Citation

  • Giammario Impullitti & Omar Licandro & Pontus Rendahl, 2018. "Technology, market structure and the gains from trade," Discussion Papers 2018/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:18/03
    as

    Download full text from publisher

    File URL: https://www.nottingham.ac.uk/cfcm/documents/papers/cfcm-2018-03.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    2. Feenstra, Robert C., 2018. "Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity," Journal of International Economics, Elsevier, vol. 110(C), pages 16-27.
    3. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
    4. Nicholas Bloom & Mirko Draca & John Van Reenen, 2016. "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 87-117.
    5. Paolo Bertoletti & Federico Etro, 2022. "Monopolistic competition, as you like it," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 293-319, January.
    6. Marc J. Melitz & Stephen J. Redding, 2021. "Trade and innovation," CEP Discussion Papers dp1777, Centre for Economic Performance, LSE.
    7. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
    8. Impullitti, Giammario & Licandro, Omar & Rendahl, Pontus, 2022. "Technology, market structure and the gains from trade," Journal of International Economics, Elsevier, vol. 135(C).
    9. Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2015. "Competition, Markups, and the Gains from International Trade," American Economic Review, American Economic Association, vol. 105(10), pages 3183-3221, October.
    10. Benassy, Jean-Pascal, 1998. "Is there always too little research in endogenous growth with expanding product variety?," European Economic Review, Elsevier, vol. 42(1), pages 61-69, January.
    11. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2019. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 140-174, October.
    12. Impullitti, Giammario & Akcigit, Ufuk & Ates, Sina T., 2018. "Innovation and Trade Policy in a Globalized World," CEPR Discussion Papers 15804, C.E.P.R. Discussion Papers.
    13. Monika Mrázová & J Peter Neary, 2019. "Selection Effects with Heterogeneous Firms," Journal of the European Economic Association, European Economic Association, vol. 17(4), pages 1294-1334.
    14. David Autor & David Dorn & Lawrence F Katz & Christina Patterson & John Van Reenen, 2020. "The Fall of the Labor Share and the Rise of Superstar Firms [“Automation and New Tasks: How Technology Displaces and Reinstates Labor”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 645-709.
    15. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    16. Philippon, Thomas & Gutierrez, German, 2018. "How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift," CEPR Discussion Papers 12983, C.E.P.R. Discussion Papers.
    17. Long, Ngo Van & Raff, Horst & Stähler, Frank, 2011. "Innovation and trade with heterogeneous firms," Journal of International Economics, Elsevier, vol. 84(2), pages 149-159, July.
    18. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    19. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, June.
    20. Paula Bustos, 2011. "Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms," American Economic Review, American Economic Association, vol. 101(1), pages 304-340, February.
    21. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-293, June.
    22. Chad Syverson, 2019. "Macroeconomics and Market Power: Context, Implications, and Open Questions," Journal of Economic Perspectives, American Economic Association, vol. 33(3), pages 23-43, Summer.
    23. Thierry Mayer & Gianmarco Ottaviano, 2008. "The Happy Few: The Internationalisation of European Firms," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 43(3), pages 135-148, May.
    24. Bajgar, Matej & Berlingieri, Giuseppe & Calligaris, Sara & Criscuolo, Chiara & Timmis, Jonathan, 2019. "Industry concentration in Europe and North America," LSE Research Online Documents on Economics 103427, London School of Economics and Political Science, LSE Library.
    25. Laurent Cavenaile & Pau Roldan-Blanco & Tom Schmitz, 2023. "International Trade and Innovation Dynamics with Endogenous Markups," The Economic Journal, Royal Economic Society, vol. 133(651), pages 971-1004.
    26. Giammario Impullitti & Omar Licandro, 2018. "Trade, Firm Selection and Innovation: The Competition Channel," Economic Journal, Royal Economic Society, vol. 128(608), pages 189-229, February.
    27. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
    28. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2019. "The Elusive Pro-Competitive Effects of Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 46-80.
    29. Parenti, Mathieu, 2018. "Large and small firms in a global market: David vs. Goliath," Journal of International Economics, Elsevier, vol. 110(C), pages 103-118.
    30. Bajgar, Matej & Berlingieri, Giuseppe & Calligaris, Sara & Criscuolo, Chiara & Timmis, Jonathan, 2019. "Industry concentration in Europe and North America," LSE Research Online Documents on Economics 103427, London School of Economics and Political Science, LSE Library.
    31. Keith Head & Barbara J. Spencer, 2017. "Oligopoly in international trade: Rise, fall and resurgence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1414-1444, December.
    32. Dermot Leahy & J. Peter Neary, 2021. "When the threat is stronger than the execution: trade and welfare under oligopoly," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 471-495, September.
    33. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
    34. Robert C. Feenstra & Philip Luck & Maurice Obstfeld & Katheryn N. Russ, 2018. "In Search of the Armington Elasticity," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 135-150, March.
    35. Colin J. Hottman & Stephen J. Redding & David E. Weinstein, 2016. "Quantifying the Sources of Firm Heterogeneity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1291-1364.
    36. de Ridder, Maarten, 2019. "Market power and innovation in the intangible economy," LSE Research Online Documents on Economics 100946, London School of Economics and Political Science, LSE Library.
    37. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
    38. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    39. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    40. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    41. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    42. Thierry Mayer & Gianmarco Ottaviano, 2007. "The happy few: the internationalisation of European firms New facts based on firm-level evidence," Working Papers hal-03459258, HAL.
    43. J. Peter Neary, 2010. "Two and a Half Theories of Trade†," The World Economy, Wiley Blackwell, vol. 33(1), pages 1-19, January.
    44. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 561-644.
    45. Peretto, Pietro F., 2003. "Endogenous market structure and the growth and welfare effects of economic integration," Journal of International Economics, Elsevier, vol. 60(1), pages 177-201, May.
    46. J. Peter Neary, 2003. "Presidential Address: Globalization and Market Structure," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 245-271, 04/05.
    47. Giammario Impullitti & Omar Licandro, 2018. "Trade, Firm Selection and Innovation: The Competition Channel," Economic Journal, Royal Economic Society, vol. 128(608), pages 189-229, February.
    48. Horstmann, Ignatius J. & Markusen, James R., 1986. "Up the average cost curve: Inefficient entry and the new protectionism," Journal of International Economics, Elsevier, vol. 20(3-4), pages 225-247, May.
    49. Lucia Foster & Cheryl Grim & Nikolas Zolas, 2020. "A portrait of U.S. firms that invest in R&D," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 29(1), pages 89-111, January.
    50. repec:hal:wpspec:info:hdl:2441/10147 is not listed on IDEAS
    51. repec:hal:spmain:info:hdl:2441/10147 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yu, Zhuangxiong & Cheng, Jiajia & Mukhopadhaya, Pundarik & Dong, Jiemiao, 2023. "Do information spillovers across products aggravate product market monopoly? An examination with Chinese data," Economic Modelling, Elsevier, vol. 125(C).
    2. Kazuhiro Takauchi & Tomomichi Mizuno & Katsufumi Fukuda, 2024. "Strategic export decisions in international trade," Discussion Papers 2401, Graduate School of Economics, Kobe University.
    3. Tchoffo, Rodrigue & Ngouhouo, Ibrahim & Nkemgha, Guivis, 2020. "Trade Liberalization and Macroeconomic Performance in Cameroon: An Imperfect Competition Approach," MPRA Paper 98558, University Library of Munich, Germany, revised 09 Feb 2020.
    4. Gutiérrez, Germán & Jones, Callum & Philippon, Thomas, 2021. "Entry costs and aggregate dynamics," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 77-91.
    5. Impullitti, Giammario & Licandro, Omar & Rendahl, Pontus, 2022. "Technology, market structure and the gains from trade," Journal of International Economics, Elsevier, vol. 135(C).
    6. Kenji Fujiwara, 2024. "Firm heterogeneity in competition among the big and the small," Bulletin of Economic Research, Wiley Blackwell, vol. 76(1), pages 147-166, January.
    7. Giammario Impullitti & Richard Kneller & Danny McGowan, 2020. "Demand‐Driven Technical Change and Productivity Growth: Theory and Evidence FROM the Energy Policy Act," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 328-363, June.
    8. Germán Gutiérrez & Callum Jones & Thomas Philippon, 2019. "Entry Costs and the Macroeconomy," NBER Working Papers 25609, National Bureau of Economic Research, Inc.
    9. Kyung In Hwang, 2022. "The pro‐competitive effects of foreign firm entry: Evidence from the Korean retail sector," The World Economy, Wiley Blackwell, vol. 45(5), pages 1587-1613, May.
    10. Impullitti, Giammario, 2022. "Credit constraints, selection and productivity growth," Economic Modelling, Elsevier, vol. 111(C).
    11. Laurent Cavenaile & Pau Roldan-Blanco & Tom Schmitz, 2023. "International Trade and Innovation Dynamics with Endogenous Markups," The Economic Journal, Royal Economic Society, vol. 133(651), pages 971-1004.
    12. Matias Covarrubias & Germán Gutiérrez & Thomas Philippon, 2019. "From Good to Bad Concentration? US Industries over the Past 30 Years," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 1-46, National Bureau of Economic Research, Inc.
    13. Bingxue Wang, 2024. "Towards a welfare model of trade and multinational firms with oligopolistic competition," International Journal of Economic Theory, The International Society for Economic Theory, vol. 20(1), pages 120-155, March.
    14. Luca Macedoni & Vladimir Tyazhelnikov, 2024. "Oligopoly and oligopsony in international trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(2), pages 401-429, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    2. Macedoni, Luca & Weinberger, Ariel, 2022. "Quality heterogeneity and misallocation: The welfare benefits of raising your standards," Journal of International Economics, Elsevier, vol. 134(C).
    3. Xavier Jaravel & Erick Sager, 2018. "What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models," Economic Working Papers 506, Bureau of Labor Statistics.
    4. Ziran Ding, 2022. "Firm heterogeneity, variable markups, and multinational production: A review from trade policy perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1311-1357, December.
    5. Keith Head & Barbara J. Spencer, 2017. "Oligopoly in international trade: Rise, fall and resurgence," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1414-1444, December.
    6. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2019. "Geography, competition, and optimal multilateral trade policy," Journal of International Economics, Elsevier, vol. 120(C), pages 145-161.
    7. Panon, Ludovic, 2022. "Labor share, foreign demand and superstar exporters," Journal of International Economics, Elsevier, vol. 139(C).
    8. Jaravel, Xavier & Sager, Erick, 2019. "What are the price effects of trade? Evidence from the US for quantitative trade models," LSE Research Online Documents on Economics 103402, London School of Economics and Political Science, LSE Library.
    9. Vanessa Alviarez & Keith Head & Thierry Mayer, 2020. "Global giants and local stars: How changes in brand ownership affect competition," Working Papers 2020-13, CEPII research center.
    10. Mrázová, Monika & Neary, J. Peter, 2020. "IO for exports(s)," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    11. Parenti, Mathieu, 2018. "Large and small firms in a global market: David vs. Goliath," Journal of International Economics, Elsevier, vol. 110(C), pages 103-118.
    12. Giammario Impullitti & Omar Licandro, 2018. "Trade, Firm Selection and Innovation: The Competition Channel," Economic Journal, Royal Economic Society, vol. 128(608), pages 189-229, February.
    13. Chara Vavoura, 2024. "The Rise of the Superstars: Uncovering the Composition Effect of International Trade That Cements the Dominant Position of Big Businesses," Mathematics, MDPI, vol. 12(10), pages 1-21, May.
    14. Teteryatnikova, Mariya, 2018. "R&D in trade networks: The role of asymmetry," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 307-350.
    15. Bingxue Wang, 2024. "Towards a welfare model of trade and multinational firms with oligopolistic competition," International Journal of Economic Theory, The International Society for Economic Theory, vol. 20(1), pages 120-155, March.
    16. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2018. "Global Firms," Journal of Economic Literature, American Economic Association, vol. 56(2), pages 565-619, June.
    17. repec:hal:wpspec:info:hdl:2441/6q707l4svn8k3bt630nhgdqgdu is not listed on IDEAS
    18. repec:spo:wpmain:info:hdl:2441/6q707l4svn8k3bt630nhgdqgdu is not listed on IDEAS
    19. Alfaro, Martin & Warzynski, Frederic, 2021. "Trade liberalization with granular firms," Economic Modelling, Elsevier, vol. 105(C).
    20. Hoste, J. & Verboven, F., 2024. "Uncovering the Sources of Cross-border Market Segmentation: Evidence from the EU and the US," Cambridge Working Papers in Economics 2402, Faculty of Economics, University of Cambridge.
    21. Demidova, Svetlana, 2017. "Trade policies, firm heterogeneity, and variable markups," Journal of International Economics, Elsevier, vol. 108(C), pages 260-273.
    22. Federico J. Diez & Jesse Mora & Alan C. Spearot, 2016. "Firms in international trade," Working Papers 16-25, Federal Reserve Bank of Boston.

    More about this item

    Keywords

    gains from trade; heterogeneous firms; oligopoly; innovation; endogenous markups; endogenous market structure.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:not:notcfc:18/03. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Hilary Hughes (email available below). General contact details of provider: https://edirc.repec.org/data/cfnotuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.