We develop a two-factor, two-sector trade model of monopolistic competition with variable elasticity of substitution. Firm profit and firm size may increase or decrease with market integration depending on the degree of asymmetry between countries. The country in which capital is relatively abundant is a net exporter of the manufactured good, while both firms' size and profits are lower in this country than in the country where capital is relatively scarce. By contrast, the pricing policy adopted by firms does not depend on capital endowment and country asymmetry. It is determined by the nature of preferences: when demand elasticity increases (decreases) with consumption, firms practice dumping (reverse-dumping). JEL:F12 AbstractWe develop a two-factor, two-sector trade model of monopolistic competition with variable elasticity of sub-

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We study a multi-country trade model with two types of countries (big and small ones). The model generalizes the case of two countries analyzed in [3] and wonder whether there could be harm from trade. Monopolistic competition, iceberg type trade costs and variable elasticity of substitution (VES) are among the model assumptions. The effects of trade liberalization on price, production and welfare are analyzed, in cases of free trade and autarky.

Examining a standard monopolistic competition model with unspecified utility/cost functions, we find necessary and sufficient conditions on their elasticities for welfare losses to arise from trade or market expansion. Two numerical examples explain the losses: excessive or insufficient entry of firms can be aggravated by market enlargement (under unrealistic elasticities).

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