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Mathieu Parenti, UCLouvain Print
Friday, 15 March 2013, 12:15 - 13:15

Mathieu Parenti, UCLouvain

International Trade: David and Goliath

Abstract: This paper studies the impact of trade liberalization when monopolistically competitive and oligopolistic firms coexist in the same market. The model is characterized by a group of multi-product firms which behave strategically and take into account their impact on market aggregates (i.e. equilibrium average price, total output) and a monopolistically competitive fringe. This difference in behavior leads large firms to charge higher markups. The conditions for the coexistence of both types of firms are derived. We show that heterogeneity in production efficiency, captured by economies of scope for large firms, is a necessary condition for both types of firms to coexist at equilibrium. Trade liberalization fosters the exit of small firms, raises social welfare, increases product variety but lowers consumer surplus through a higher average price.

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