Investments in Productivity and Quality under Trade Liberalization: Monopolistic Competition Model

Authors

  • Igor Bykadorov Sobolev Institute of Mathematics Siberian Branch of the Russian Academy of Sciences; Novosibirsk State University
  • Sergey Kokovin Sobolev Institute of Mathematics Siberian Branch of the Russian Academy of Sciences; Novosibirsk State University; National Research University Higher School of Economics
  • Evgeny Zhelobodko Novosibirsk State University; National Research University Higher School of Economics

Abstract

We study impact of trade liberalization on firms productivity and product quality in a monopolistic competition model. Utility has variable elasticity of substitution (VES), aproducer can invest in decreasing marginal cost or in increasing quality and free entry drives profits to zero. Then in a closed economy such investments increase with the market size if and only if utility shows increasing ”relative love for variety” which is elasticity of the inverse demand. Expanding these findings to international trade setting, we expect to find comparative statics of equilibria with respect to the market size and trade costs.

Keywords:

investments, quality, monopolistic competition, trade liberalization, relative love for variety, country size

Downloads

Download data is not yet available.

References

Aw, B.Y., M.J. Roberts and D.Y. Xu (2008). R&D Investments, Exporting, and the Evolution of Firm Productivity. American Economic Review: Papers & Proceedings, 98(2), 451–456.

Baldwin, R.E. and R. Forslid (2010). Trade Liberalization with Heterogeneous Firms. Review of Development Economics, 14(2), 161–176.

Behrens, K. and Y. Murata (2007). General equilibrium models of monopolistic competition: a new approach. Journal of Economic Theory, 136, 776–787.

Bustos, P. (2011). Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms. American Economic Review, 101, 304–340.

Campbell, J.R. and H.A. Hopenhayn (2005). Market size matters. Journal of Industrial Economics, LIII, 1–25.

Davis, D.R. (1998). The Home Market, Trade, and Industrial Structure. American Economic Review, 88(5), 1264–1276.

Dixit, A. and J. Stiglitz (1977). Monopolistic Competition and Optimum Product Diversity. American Economic Review, 67(3), 297–308.

Dhingra, S. and J. Morrow (2011). The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition. Memo.

Fan, C.S. (2005). Increasing Returns, Product Quality and International Trade. Economica, 72, 151–169.

Hummels, D. and P.T. Klenow (2005). The Variety and Quality of a Nation’s Exports. The American Economic Review, 95(3), 704–723.

Krugman, P.R. (1979). Increasing returns, monopolistic competition, and international trade. Journal of International Economics, 9, 469–479.

Krugman P.R. (1980). Scale Economies, Product Differentiation, and the Pattern of Trade. American Economic Review, 70(5), 950–959.

Melitz, M.J. The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity. Econometrica, 71(6), 1695–1725.

Ottaviano, G.I.P., T. Tabuchi and J.-F. Thisse (2002). Agglomeration and trade revisited. International Economic Review, 43, 409–436.

Redding, S.J. (2011). Theories of Heterogeneous Firms and Trade. Annual Review of Economics, 3, 77–105.

Syverson, C. (2007). Prices, spatial competition, and heterogeneous producers: an empirical test. Journal of Industrial Economics, LV, 197–222.

Tanaka, Y. (1995). Trade Liberalization, Product Quality and Consumer’s. Welfare under Monopolistic Competition. Keio Economic Studies, 32(1), 67–76.

Tirole, J. (1988). The Theory of Industrial Organization. Cambridge, MA: MIT Press.

Vives, X. (1999) Oligopoly Pricing. Old Ideas and New Tools. Cambridge, MA: MIT Press.

Vives, X. (2008). Innovation and competitive pressure. The Journal of Industrial Economics, 56(3), 419–469.

Yeaple, S.R. (2005). A simple model of firm heterogeneity, international trade, and wages. Journal of International Economics, 65, 1–20.

Yu, Z. (2005). Trade, market size, and industrial structure: revisiting the home-market effect. Canadian Journal of Economics/Revue canadienne d’'economique, 38(1), 255–272.

Zhelobodko, E., S. Kokovin and J. -F. Thisse (2010). Monopolistic competition: beyond the CES. CEPR Discussion Paper N. 7947, 41 p.

Zhelobodko, E., S. Kokovin, M. Parenti and J.-F. Thisse (2011). Monopolistic competition in general equilibrium: beyond the CES. CORE Discussion Paper 2011/27, 40 p.

Downloads

Published

2023-01-25

How to Cite

Bykadorov, I., Kokovin, S., & Zhelobodko, E. (2023). Investments in Productivity and Quality under Trade Liberalization: Monopolistic Competition Model. Contributions to Game Theory and Management, 5, 61–72. Retrieved from https://gametheory.spbu.ru/article/view/14303

Issue

Vol. 5 (2012)

Section

Articles

License

Articles of "Contributions to Game Theory and Management" are open access distributed under the terms of the License Agreement with Saint Petersburg State University, which permits to the authors unrestricted distribution and self-archiving free of charge.