Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76760
Authors: 
Foellmi, Reto
Hepenstrick, Christian
Zweimüller, Josef
Year of Publication: 
2010
Series/Report no.: 
Discussion Papers, Department of Economics, Universität Bern 10-09
Abstract: 
We study international trade in a model where consumers have non-homothetic preferences and where household income restricts the extensive margin of consumption. In equilibrium, monopolistic producers set high (low) prices in rich (poor) countries but a threat of parallel trade restricts the scope of price discrimination between countries. The threat of parallel trade allows differences in per capita incomes to have a strong impact on the extensive margin of trade, whereas differences in population sizes have a weaker effect. We also show that the welfare gains from trade liberalization are biased towards rich countries. We extend our model to more than two countries; to unequal incomes within countries; and to more general specifications of non-homothetic preferences. Our basic results are robust to these extensions.
Subjects: 
heterogenous markups
non-homothetic preferences
parallel imports
extensive margin of trade
JEL: 
F10
F12
F19
Document Type: 
Working Paper

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