Structural Gravity and the Gains from Trade Under Imperfect Competition
61 Pages Posted: 27 Feb 2020
Date Written: 2020
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 firmsâ€™ 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
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