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Behrens, Kristian
Kichko, Sergey
Ushchev, Philip
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 6965
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.
monopolistic competition
variable markups
trade liberalization
non-traded goods
markup divergence
Document Type: 
Working Paper

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