Working Paper: NBER ID: w13130
Authors: Edward J. Balistreri; James R. Markusen
Abstract: We illuminate the relationship between optimal firm pricing and optimal trade policy by exploring a generalized model that accommodates product differentiation at both the national and sub-national (firm) levels. We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their terms of trade through trade distortions, because firms play an important preemptive role in optimally pricing unique varieties. We contrast this with standard applications of perfect-competition Armington models, which exhibit high optimal tariffs--even for relatively small countries.
Keywords: Optimal Pricing; Trade Policy; Firm Differentiation
JEL Codes: F1; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm differentiation (L29) | optimal tariffs (F13) |
| firm differentiation exceeds national differentiation (F23) | negative optimal tariffs (F13) |
| consumer preferences (D11) | optimal tariffs (F13) |
| firm behavior (D21) | trade policy outcomes (F13) |