Market Size, Trade, and Productivity

No 201, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Abstract: We develop a monopolistically competitive model of trade with firm heterogeneity - in terms of productivity differences - and endogenous differences in the ‘toughness’ of competition across markets - in terms of the number and average productivity of competing firms. We analyze how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average markups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower markups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modeling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous markups.

Keywords: market structure; market size; productivity heterogeneity; endogenous markups; trade liberalization (search for similar items in EconPapers)
JEL-codes: F12 R13 (search for similar items in EconPapers)
Date: 2005-06-15
New Economics Papers: this item is included in nep-eff and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (131)

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Related works:
Chapter: Market Size, Trade, and Productivity (2021)
Journal Article: Market Size, Trade, and Productivity (2008)
Working Paper: Market Size, Trade, and Productivity (2008)
Working Paper: Market Size, Trade, and Productivity (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:csl:devewp:201

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