The pro-competitive gains from trade with variable markup and multiple factors

Abstract

The paper investigates the welfare gains from trade liberalization in the presence of multiple factors, multiple industries and variable markup. We extend Bernard, Redding and Schott (2007) to incorporate variable markup, using additively separable utility. We then characterize the equilibrium under costly trade and discuss the welfare implications of Heckscher-Ohlin mechanism, as well as the variable markup. Our main nding is that gains from trade liberalization are higher in models with variable markup than those with constant markup when the Heckscher-Ohlin force is strong enough. The larger the trade cost decreases, the stronger the Heckscher-Ohlin force is. We conclude that the pro-competitive e ect of trade liberalization does exist in the presence of Heckscher-Ohlin comparative advantage and variable markup.Bachelor of Art