Market size, income heterogeneity, and trade

[en] This paper studies the effects of market enlargement in the context of monopolistic competition, variable markups, and income heterogeneity. Market enlargement increases product diversity and entices firms to reduce prices and markups due to pro-competitive effects. It benefits all individuals but more high-income ones. The strength of the market enlargement effect is independent of income inequality for Pollak's (1971) preferences. In an open economy, the market enlargement of one country reduces prices globally while it fosters firm entry in this country and exit in the other country. Welfare gains are also larger for higher-income groups. A calibration exercise suggests that effects on market outcome and welfare gains are sizable.

Disciplines :

Microeconomics

Author, co-author :

Kichko, Sergei ; Department of Economics and Management, University of Trento, Italy

PICARD, Pierre M ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM)

External co-authors :

yes

Language :

English

Title :

Market size, income heterogeneity, and trade

Publication date :

February 2024

Journal title :

Economics Letters

ISSN :

0165-1765

eISSN :

1873-7374

Publisher :

Elsevier B.V.

Volume :

235

Pages :

111526

Peer reviewed :

Peer Reviewed verified by ORBi

Additional URL :

https://api.elsevier.com/content/article/PII:S0165176524000107?httpAccept=text/xml

Funders :

Fonds National de la Recherche Luxembourg

Funding text :

This project has benefited from funding by the Luxembourg National Research Fund (FNR) [grant C20/SC/14755507 and Inter/Mobility/2021/LE/16527808 ]. For the purpose of open access, Picard has applied a Creative Commons Attribution 4.0 International (CCBY4.0) license to any Author Accepted Manuscript version arising from this submission.

Available on ORBilu :

since 13 May 2025

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