Trade, Competition, and Efficiency

CIRPEE Working Paper No. 09-40

23 Pages Posted: 22 Sep 2009

See all articles by Kristian Behrens

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics

Yasusada Murata

Nihon University

Date Written: September 22, 2009

Abstract

We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.

Keywords: Pro-competitive effects, competitive limit, excess entry, trade and efficiency, monopolistic competition

JEL Classification: D43, D51, F12

Suggested Citation

Behrens, Kristian and Murata, Yasusada, Trade, Competition, and Efficiency (September 22, 2009). CIRPEE Working Paper No. 09-40, Available at SSRN: https://ssrn.com/abstract=1477016 or http://dx.doi.org/10.2139/ssrn.1477016

Kristian Behrens (Contact Author)

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Yasusada Murata

Nihon University ( email )

Tokyo
Japan

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