Working Paper: CEPR ID: DP7939
Authors: Reto Foellmi; Christian Hepenstrick; Josef Zweimller
Abstract: We study international trade in a model where consumers have non-homothetic preferences and where household income restricts the extensive margin of consumption. In equilibrium, monopolistic producers set high (low) prices in rich (poor) countries but a threat of parallel trade restricts the scope of price discrimination between countries. The threat of parallel trade allows differences in per capita incomes to have a strong impact on the extensive margin of trade, whereas differences in population sizes have a weaker effect. We also show that the welfare gains from trade liberalization are biased towards rich countries. We extend our model to more than two countries; to unequal incomes within countries; and to more general specifications of non-homothetic preferences. Our basic results are robust to these extensions.
Keywords: extensive margin of trade; heterogeneous markups; non-homothetic preferences; parallel imports
JEL Codes: F10; F12; F19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in per capita incomes (D31) | Extensive margin of trade (F10) |
| Per capita income disparities (D31) | Trade volume (F10) |
| Trade liberalization (F13) | Terms of trade for rich countries (F14) |
| Trade liberalization (F13) | Range of imported goods for poorer countries (F14) |
| Income differences (D31) | Consumer willingness to pay (D11) |
| Non-homothetic preferences (D11) | Price discrimination (D40) |