Measuring the Gains from Trade Under Monopolistic Competition

39 Pages Posted: 22 Dec 2009 Last revised: 9 Feb 2023

See all articles by Robert C. Feenstra

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2009

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

Feenstra, Robert C., Measuring the Gains from Trade Under Monopolistic Competition (December 2009). NBER Working Paper No. w15593, Available at SSRN: https://ssrn.com/abstract=1525771

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