Trade, Competition, and Efficiency

Kristian Behrens () and Yasusada Murata

Abstract: We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.

Keywords: Pro-competitive effects; competitive limit; excess entry; trade and efficiency; monopolistic competition (search for similar items in EconPapers)
JEL-codes: D43 D51 F12 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-com, nep-int and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Trade, competition, and efficiency (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0940

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