Why are losses from trade unlikely?

Abstract

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).

Input–output linkages and optimal product diversity

“…The key message is that a decreasing elasticity of utility usually generates excess entry (Dixit and Stiglitz, 1977;Dhingra and Morrow, 2017) while the links between a decreasing elasticity of utility and pro-competitive eects have been studied by Bykadorov et al (2015). They show that utilities with decreasing elasticity typically generate pro-competitive eects under monopolistic competition with additive preferences.…”

Input-Output Linkages and Optimal Product Diversity

“…The key message is that a decreasing elasticity of utility usually generates excess entry (Dixit and Stiglitz, 1977;Dhingra and Morrow, 2017) while the links between a decreasing elasticity of utility and pro-competitive eects have been studied by Bykadorov et al (2015). They show that utilities with decreasing elasticity typically generate pro-competitive eects under monopolistic competition with additive preferences.…”

Pro-Competitive Effects and Harmful Trade Liberalization in Multi-Country World

“…Even losses from trade are proved under VES conditions; indeed, Bykadorov et al [4] established necessary and sufficient conditions for welfare reduction in a generalized Dixit-Stiglitz-Krugman model (see [5], [6]) when a general-form (unspecified) additive utility and non-linear costs are assumed. The conditions under which losses may occur when jumping from autarky to free trade are related to misaligned preferences and specific costs.…”

“…The conditions under which losses may occur when jumping from autarky to free trade are related to misaligned preferences and specific costs. Therefore, these conditions are so stringent that [4] concludes that trade losses are unlikely in the real economy.…”