Market Size, Trade, and Productivity

Abstract

We develop a monopolistically competitive model of trade with firm heterogeneity -in terms of productivity differences -and endogenous differences in the 'toughness' of competition across markets -in terms of the number and average productivity of competing firms. We analyze how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average markups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower markups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modeling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous markups.

Unionisation Structures, Productivity, and Firm Performance

“…As a result, demand price elasticities increase, the least productive firms are forced to exit and c H L and c F L decrease. This is the mechanism highlighted by Melitz and Ottaviano (2008). If wages were identical across countries, dismantling trade barriers would always lower the cost cut-offs in both countries.…”

“…To that end, I study a monopolistic competition model in the spirit of Melitz and Ottaviano (2008) with heterogeneous firms and free entry. The model incorporates both differences in firm productivity and endogenous mark-ups that respond to the intensity of competition in a market.…”

Trade liberalization, democratization, and technology adoption

“…He also notices, however, that not all countries appear to have equally profited from this opportunity and concludes that it would be important to further investigate the incentives for endogenous technology adoption. Following Melitz (2003) and Melitz and Ottaviano (2008), a number of recent contributions in international trade predict aggregate industry productivity to grow with trade liberalization through a selection effect, produced by the reallocation of resources towards more productive firms. This self-selection mechanism, which is supported by a large and increasing empirical evidence, can contribute to explain part of the losses faced by the autocratic elites if they tend to concentrate their interests in relatively less efficient firms (or sectors of production).…”

Job Creation, Job Destruction and Firms’ International Trade Involvement

“…Moreover, they did not consider the role of FDI. 10 6 Other important extensions of the basic set-up of Melitz (2003) are Bernard, Redding and Schott (2004), who integrate heterogeneous firms into the relative factor endowment framework of Heckscher and Ohlin, as well as Falvey, Greenaway and Yu (2004), who consider two countries with different wage levels, and Melitz and Ottaviano (2005), who use a demand structure generating variable mark-ups. The reallocation of resources and jobs from nonexporters towards exporters is a common prediction of all these models.…”