Dynamic Gains from International Trade with Imperfect Competition and Market Power |
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Authors: | Michael B. Devereux,& Khang Min Lee |
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Affiliation: | Department of Economics, University of British Columbia, Vancouver, BC, Canada |
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Abstract: | This paper revisits the gains from trade under imperfect competition by explicitly modeling strategic competition and entry. The papers highlights a welfare cost of imperfect competition, due to inefficiently high entry. Through increasing competition, international trade lowers price–cost markups and reduces excessive entry. This adds on a "competitive" channel for gains from trade to the well-known "product diversity" channel from previous literature. Both channels will increase the return to investment and raise the steady-state capital stock. An alternative case is possible, however, where there is inefficiently low entry. In that case, trade tends to be "anticompetitive," raising price–cost markups and encouraging increased entry. |
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