Trade patterns and export pricing under non-CES preferences

Abstract

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-

Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity

“…A more common choice is to use the additively separable utility function introduced by Krugman (1979), possibly with an explicit functional form for the sub-utility from each variety. 5 Zhelobodko et al (2010Zhelobodko et al ( , 2011, Kichko et al (2013) and Dhingra and Morrow (2012) consider a broader class of additively separable functions than Krugman (1979) by allowing the elasticity of demand to be increasing or decreasing in quantity. These authors argue for a pro-competitive effect of trade in the latter case only (as assumed by Krugman and holding here).…”

Product Differentiation, Competitive Toughness, and Intertemporal Substitution

“…Following Martin and Rogers () and Kichko et al . (), we assume that each firm incurs a fixed capital requirement f >0 and a constant marginal labor requirement c >0 . Combining this with equation implies that profits of firm i are given by…”

“…Production technologies are identical across firms and exhibit increasing returns to scale. Following Martin and Rogers (1995) and Kichko et al (2014), we assume that each firm incurs a fixed capital requirement f > 0 and a constant marginal labor requirement c > 0. 10 Combining this with equation (10) implies that profits of firm i are given by…”

Impact of Free Trade Agreement Use on Import Prices

“…Krugman (1979) assumed decreasing price elasticity in his seminal paper on intra-industry trade. Bertoletti and Epifani (2014) and Kichko, Kokovin, and Zhelobodko (2014) showed that a decreasing elasticity of substitution in the utility function yields ′() < 0. Decreasing price elasticities were also obtained by Melitz and Ottaviano (2008) with a linear demand function and by Behrens and Murata (2007) with additively quasi-separable functions.…”