TY  - JOUR
AU  - Melitz,Marc J.
AU  - Ottaviano,Gianmarco I.P.
TI  - Market Size, Trade, and Productivity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11393
PY  - 2005
Y2  - June 2005
UR  - http://www.nber.org/papers/w11393
L1  - http://www.nber.org/papers/w11393.pdf
N1  - Author contact info:
Marc Melitz
Department of Economics
Harvard University
215 Littauer Center
Cambridge, MA 02138
E-Mail: mmelitz@harvard.edu

Gianmarco Ottaviano
Department of Economics
Bocconi University
Via Roentgen 1
20136 Milan
Italy
E-Mail: gianmarco.ottaviano@unibocconi.it
AB  - 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.
ER  -