Losses from Trade in Krugman's Model: Almost Impossible
12 Pages Posted: 18 Jul 2014
Date Written: July 17, 2014
Studying the standard monopolistic competition model with unspecified utility/cost functions, we find necessary and sufficient conditions on the function elasticities, when an expanding market or trade incur welfare losses. Two numerical examples explain why: either excessive or insufficient entry of firms is aggravated by market growth. The variable marginal cost enforces the harmful effect. Still harm looks practically improbable.
Keywords: Market distortions, Trade gains, Variable markups, Demand elasticity.
JEL Classification: F12, L13
Suggested Citation: Suggested Citation