Measuring the Gains from Trade under Monopolistic Competition
NBER Working Paper No. 15593
Three sources of gains from trade under monopolistic competition are: (i) new import varieties available to consumers; (ii) enhanced efficiency as more productive firms begin exporting and less productive firms exit; (iii) reduced markups charged by firms due to import competition. The first source of gains can be measured as new goods in a CES utility function for consumers. We argue that the second source is formally analogous to the producer gain from new goods, with a constant-elasticity transformation curve for the economy. We suggest that the third source of gain can be measured using a translog expenditure function for consumers, which in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups.
Published: Robert C. Feenstra, 2010. "Measuring the gains from trade under monopolistic competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 1-28, February.