Entry, Size Expansion, and Gains from Trade with Heterogeneous Firms

25 Pages Posted: 6 Aug 2020

See all articles by Jiahua CHE

Jiahua CHE

China Europe International Business School

Wen Zhou

University of Hong Kong

Date Written: July 17, 2020

Abstract

This paper presents a simple model of monopolistic competition that features a general class of additively separable preferences without any fixed costs. While trade always crowds out less productive firms as long as countries are symmetric, we show that the impact is independent of entry/exit a la Hopenhayn, and is different from the effect of market size expansion, which may crowd in less productive firms. Our analysis pin-points the source of gains from trade in the presence of heterogeneous firms as bringing about new varieties from foreign countries by expanding more productive firms at home.

Keywords: Firm heterogeneity, International trade, Entry, Market expansion

JEL Classification: F10, F12, F14

Suggested Citation

CHE, Jiahua and Zhou, Wen, Entry, Size Expansion, and Gains from Trade with Heterogeneous Firms (July 17, 2020). Available at SSRN: https://ssrn.com/abstract=3653988 or http://dx.doi.org/10.2139/ssrn.3653988

Jiahua CHE (Contact Author)

China Europe International Business School ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

HOME PAGE: http://https://www.ceibs.edu/cjiahua

Wen Zhou

University of Hong Kong ( email )

1225 KKL Building
Pokfulam Road
Hong Kong
China

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