Gains from Trade and Efficiency Under Monopolistic Competition: A Variable Elasticity Case

CORE Discussion Paper No. 2006/49

24 Pages Posted: 22 Aug 2006

See all articles by Kristian Behrens

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Yasusada Murata

Nihon University - Advanced Research Institute for the Sciences and Humanities

Date Written: May 2006

Abstract

We present a general equilibrium model of monopolistic competition with variable demand elasticities and investigate the impact of free trade on welfare and efficiency. First, contrary to the constant elasticity case, in which all gains from trade are due to increasing product diversity, our model features gains from pro-competitive effects. Second, we prove that the market outcome is not efficient because too many firms operate at an inefficiently small scale. Last, we illustrate that free trade raises efficiency by reducing the gap between the equilibrium utility and the optimal utility.

Keywords: international trade, monopolistic competition, variable elasticity, gains from trade, efficiency

JEL Classification: D43, D51, F12

Suggested Citation

Behrens, Kristian and Murata, Yasusada, Gains from Trade and Efficiency Under Monopolistic Competition: A Variable Elasticity Case (May 2006). CORE Discussion Paper No. 2006/49. Available at SSRN: https://ssrn.com/abstract=925665 or http://dx.doi.org/10.2139/ssrn.925665

Kristian Behrens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.core.ucl.ac.be:16080/~behrens/

Université de Bourgogne - LATEC

Pôle d'Economie et de Gestion
21066 Dijon Cedex
France

Yasusada Murata

Nihon University - Advanced Research Institute for the Sciences and Humanities ( email )

Tokyo
Japan

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