Working Paper: CEPR ID: DP16062
Authors: Giammario Impullitti; Omar Licandro; Pontus Rendahl
Abstract: We study the gains from trade in a model with oligopolistic competition, heterogeneous firms andinnovation, and provide a formula to decompose the mechanism. The new insight we provide is thatmarket concentration can be a welfare-relevant feature of market power above and beyond markupdispersion. Trade liberalisation increases foreign competition and reduces the number of active firmsin the market, thereby increasing concentration. A more concentrated economy is more efficient dueto increasing returns in production. Moreover, higher concentration produces a scale effect on firms’incentives to innovate, which increases welfare via productivity improvements. In the calibratedversion of the model we show that a trade-induced increase in concentration contributes substantiallyto the gains from trade, mostly via its stimulating effect on innovation. Sizeable gains also comefrom the reduction of the inefficiency produced by trade in identical goods; i.e. through a reductionin reciprocal dumping. Changes in markup dispersion, in contrast, have only negligible effects.
Keywords: gains from trade; heterogeneous firms; oligopoly; innovation; endogenous markups; market concentration
JEL Codes: F12; F13; O31; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalisation (F13) | increased concentration (D30) |
| increased concentration (D30) | increased efficiency (D61) |
| increased concentration (D30) | increased innovation (O35) |
| increased innovation (O35) | increased productivity (O49) |
| increased productivity (O49) | increased welfare (I38) |
| trade liberalisation (F13) | reduced inefficiency from reciprocal dumping (F18) |
| reduced inefficiency from reciprocal dumping (F18) | increased welfare (I38) |
| trade liberalisation (F13) | increased efficiency (D61) |
| increased concentration (D30) | increased welfare (I38) |