A Simple Model of Trade with Heterogeneous Firms and Trade Policy

Fukushima, Marcelo and Kikuchi, Toru (2008): A Simple Model of Trade with Heterogeneous Firms and Trade Policy.

Abstract

This paper builds a Ricardian-Chamberlinian two-country model with heterogeneous firms in a monopolistically competitive sector in which every new entrant faces increasing fixed costs of production. There are efficiency gaps between countries in marginal and fixed costs and a country unilaterally imposes an import tariff. It is shown that an increase in tariff increases the number of firms of the tariff imposing country while decreases the number of firms of the tariff-imposed country, possibly reverting the position of net exporter of varieties. A tariff is detrimental to the tariff-imposed country. A small tariff may be beneficial to the tariff-imposing country.

• Item Type: MPRA Paper
• Language: English
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation

References

[1] Dixit, A. K., and Stiglitz, J. E., “Monopolistic Competition and Optimum Product Diversity”, the American Economic Review, Volume 67 (June 1977) 297-308

[2] Helpman, E. and Krugman, P., Market Structure and Foreign Trade, (1985) MIT Press, Cambridge MA