Allocative Efficiency, Mark-Ups, and the Welfare Gains from Trade

32 Pages Posted: 1 Aug 2013 Last revised: 30 Aug 2021

See all articles by Thomas Holmes

Thomas Holmes

affiliation not provided to SSRN

Thomas J. Holmes

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Wen-Tai Hsu

Singapore Management University

Sanghoon Lee

University of British Columbia (UBC) - Sauder School of Business

Date Written: August 2013

Abstract

This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.

Suggested Citation

Holmes, Thomas and Holmes, Thomas J. and Hsu, Wen-Tai and Lee, Sanghoon, Allocative Efficiency, Mark-Ups, and the Welfare Gains from Trade (August 2013). NBER Working Paper No. w19273, Available at SSRN: https://ssrn.com/abstract=2304699

Thomas Holmes (Contact Author)

affiliation not provided to SSRN

Thomas J. Holmes

University of Minnesota - Twin Cities - Department of Economics ( email )

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919 Management & Economics
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National Bureau of Economic Research (NBER)

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Wen-Tai Hsu

Singapore Management University ( email )

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Singapore
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Sanghoon Lee

University of British Columbia (UBC) - Sauder School of Business ( email )

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Vancouver, BC V6T 1Z2
Canada

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