Structural Gravity and the Gains from Trade Under Imperfect Competition

61 Pages Posted: 27 Feb 2020

See all articles by Benedikt Heid

Benedikt Heid

University of Adelaide

Frank Stähler

University of Tuebingen - Department of Economics; University of Adelaide - School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2020

Abstract

We extend structural gravity models of bilateral trade flows to oligopolistic competition. We show that conventional gravity estimates do not only reflect trade costs but also market power. Our simple estimation procedure generalizes the standard gravity model and disentangles exogenous trade frictions and endogenous market power distortions. We use our estimated model to counterfactually increase trade costs by abolishing the European Single Market. We find that domestic firms’ markups in EU member countries increase by 2 to 6 percent. Importantly, welfare effects of trade liberalization are much more pronounced due to the change in competition among domestic and foreign firms.

Keywords: trade, structural gravity, imperfect competition, market power

JEL Classification: F100, F120

Suggested Citation

Heid, Benedikt and Stähler, Frank, Structural Gravity and the Gains from Trade Under Imperfect Competition (2020). CESifo Working Paper No. 8121, Available at SSRN: https://ssrn.com/abstract=3544507

Benedikt Heid (Contact Author)

University of Adelaide ( email )

No 233 North Terrace, School of Commerce
Adelaide, South Australia 5005
Australia

Frank Stähler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.frank-staehler.de

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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