Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/176984 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 6965
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We develop a general equilibrium model of monopolistic competition with a traded and a non-traded sector. Using a broad class of homothetic preferences—that generate variable markups, display a simple behavior of their elasticity of substitution, and nest the ces as a limiting case—we show that trade liberalization: (i) reduces domestic markups and increases imported markups in the traded sector; (ii) increases markups in the non-traded sector; and (iii) increases firm sizes in both sectors. Thus, while domestic and export markups in the traded sector converge across countries, markups diverge across sectors within countries. The negative welfare effects of higher markups and less consumption diversity in the non-traded sector dampen the positive welfare effects of lower markups and greater diversity in the traded sector.
Subjects: 
monopolistic competition
variable markups
trade liberalization
non-traded goods
markup divergence
JEL: 
F12
F15
Document Type: 
Working Paper
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