Intersectoral Markup Divergence

40 Pages Posted: 30 May 2018

See all articles by Kristian Behrens

Kristian Behrens

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

Sergey Kichko

National Research University Higher School of Economics

Philip Ushchev

HSE University

Date Written: April 09, 2018


We develop a general equilibrium model of monopolistic competition with a traded and a non-traded sector. Using a broad class of homothetic preferences—that generate variable markups, display a simple behavior of their elasticity of substitution, and nest the ces as a limiting case—we show that trade liberalization: (i) reduces domestic markups and increases imported markups in the traded sector; (ii) increases markups in the non-traded sector; and (iii) increases firm sizes in both sectors. Thus, while domestic and export markups in the traded sector converge across countries, markups diverge across sectors within countries. The negative welfare effects of higher markups and less consumption diversity in the non-traded sector dampen the positive welfare effects of lower markups and greater diversity in the traded sector.

Keywords: monopolistic competition, variable markups, trade liberalization, non-traded goods, markup divergence

JEL Classification: F120, F150

Suggested Citation

Behrens, Kristian and Kichko, Sergey and Ushchev, Philip, Intersectoral Markup Divergence (April 09, 2018). CESifo Working Paper Series No. 6965, Available at SSRN:

Kristian Behrens

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

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

Sergey Kichko (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017

Philip Ushchev

HSE University ( email )

3a Kantemirovskaya St, room 405
123 Griboedov Canal Embankment, room 123
Saint-Petersburg, Saint Petersburg 191119

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