15-03-06-BEH (1)
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Gains from trade and efficiency under monopolistic competition: a variable elasticity case ∗ Kristian Behrens † Yasusada Murata ‡ February 28, 2006 Abstract We present a general equilibrium model of monopolistic competition with variable demand elasticities and investigate the impact of free trade on wel- fare and efficiency . First, contrary to the constant elasticit y case, in which all gains from trade are due to increasing product diversity, our model features gains from pro-competitive effects. Second, we show that the market outcome is not constrained efficient because too many firms operate at an inefficiently small scale . Last, we prove that free trade raises efficiency by narro wing the gap between the equilibrium utility and the constrained optimal utility. Keywords: international trade; monopolistic competition; variable elastic- ity; gains from trade; efficiency JEL Classification: D43; D51; F12 ∗ We thank Takumi Naito, Gianmarco I.P. Ottaviano and Pierre M. Picard for valuable com- men ts on an earlier draft of this paper. The first auth or gratefully ackno wledge s financial support from the Europea n Commission under the Marie Curie Fe llowsh ip MEIF -CT-20 05-024266. This research was partially supported by the Ministry of Education, Culture, Sports, Science and Tech- nology (MEXT, Jap an) , Grant-in-Aid for 21st centur y COE Progra m. Part of the paper was written while both authors were visiting KIER, Kyoto University, and while the first author was visiting ARISH, Nihon University. We gratefully acknowledge the hospitality of these institutions. The ususal disclaime r applie s. † CORE, Universit´ e catholique de Louvain, 34 voie du Roman Pays, 1348 Louvain-la-Neuve, Belgium. E-mail: [email protected] ‡ Advanced Research Institute for the Sciences and Humanities, Nihon University, 12-5, Goban- cho, Chiyoda-ku, Tokyo 102-8251, Japan. E-mail: [email protected] 1
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