Working Paper: NBER ID: w13703
Authors: Robert Feenstra; Hong Ma
Abstract: In this paper we develop a monopolistic competition model where firms exercise their market power across multiple products. Even with CES preferences, markups are endogenous. Firms choose their optimal product scope by balancing the net profits from a new variety against the costs of "cannibalizing" their own sales. With identical costs across firms, opening trade leads to fewer firms surviving in each country but more varieties produced by each of those firms. With heterogeneous costs, the number of firms surviving in equilibrium is quite insensitive to the market size. When trade is opened, more firms initially enter, but the larger market size reduces the cannibalization effect and expands the optimal scope of products. As a result, the less efficient firms exit, and the larger market is accommodated by more efficient firms that produce more varieties per firm on average.
Keywords: No keywords provided
JEL Codes: F12; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| opening trade (F10) | reduction in the number of firms surviving in each country (L10) |
| opening trade (F10) | reduction in cannibalization effect (D16) |
| reduction in cannibalization effect (D16) | expansion of optimal product scope (L25) |
| increase in market size (F61) | increase in number of varieties produced per firm (L15) |
| increase in market size (F61) | insensitivity of number of surviving firms to market size (L25) |
| opening trade (F10) | improvement in consumer welfare (D18) |