Monopolistic competition: CES redux?

Paolo Bertoletti, Paolo Epifani

Research output: Journal PublicationArticlepeer-review

31 Citations (Scopus)

Abstract

We study the competitive and reallocation effects of trade opening in monopolistic competition. To this purpose, we generalize the Melitz (2003) setup with heterogeneous firms and fixed and variable trade costs beyond the CES to the case of additively separable utility functions. We find that extensive margin (Melitz-type selection) effects are robust to relaxing the CES assumption. Intensive margin effects (market share reallocations across inframarginal firms) and competitive (markup) effects are instead fragile. An important implication is that measured productivity gains from trade opening are no longer ensured with non-CES preferences. We discuss our results in the light of alternative setups featuring non-additive preferences, strategic interaction and consumers' preference for an ideal variety.

Original languageEnglish
Pages (from-to)227-238
Number of pages12
JournalJournal of International Economics
Volume93
Issue number2
DOIs
Publication statusPublished - Jul 2014
Externally publishedYes

Keywords

  • CES preferences
  • Competitive and reallocation effects
  • International trade
  • Monopolistic competition

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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