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Endogenous Market Structures and International Trade: Theory and Evidence
Author(s) -
Etro Federico
Publication year - 2015
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12084
Subject(s) - monopolistic competition , economics , cournot competition , bertrand paradox (economics) , free entry , microeconomics , imperfect competition , elasticity of substitution , homogeneous , bertrand competition , unitary state , elasticity (physics) , perfect competition , price elasticity of demand , market structure , comparative advantage , oligopoly , international trade , production (economics) , physics , materials science , political science , law , composite material , thermodynamics , monopoly
Under constant elasticity of substitution (CES) preferences and Cournot (or Bertrand) competition, a larger market induces exits of domestic firms, lower prices, and larger production of surviving firms because of competition from more foreign firms, even without resorting to the selection effects of Melitz. The elasticity of the number of firms to population decreases with substitutability between goods, and it reaches 0.5 under Cournot competition with homogeneous goods: empirical evidence supports this structural relation against the unitary elasticity of monopolistic competition. The results hold also in a 2 × 2 × 2 Heckscher–Ohlin model with imperfect competition generating inter‐ and intra‐industry trade due to comparative advantage or comparative preferences.