International Trade and Firms' Heterogeneity Under Monopolistic Competition
This paper aims at shedding some light on the interactions between international trade and firms' heterogeneity, by proposing a tractable model consistent with the stylised facts unveiled by the recent empirical literature. The model describes, in a general equilibrium framework, two economies producing and trading two goods, one homogeneous and the other differentiated. In the differentiated-good sector, firms are heterogeneous by their marginal cost, in a context of monopolistic competition with free-entry and exit. They incur a fixed production cost, but also a fixed cost if they choose to export. We pay special attention to the way firms' heterogeneity influences the nature of trade and, reciprocally, to the impact of trade on the population of firms, and to its consequences in terms of industry-wide efficiency. In particular, we show that trade in differentiated goods increases industry-wide efficiency, through two different logics: one defensive, import-driven; the other offensive, export-driven. Furthermore, as soon as international efficiency differences and trade cost are sufficiently low, the offensive logic is dominant in shaping the impact of trade.
International trade; Firms' heterogeneity; Product differentiation; Monopolistic competition; Productive efficiency
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