Discussion Paper Details

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Title: Non-homothetic preferences, parallel imports and the extensive margin of international trade

Author(s): Reto Foellmi, Christian Hepenstrick and Josef Zweimüller

Publication Date: August 2010

Keyword(s): extensive margin of trade, Heterogenous markups, non-homothetic preferences and parallel imports

Programme Area(s): Industrial Organization and International Trade and Regional Economics

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.

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Bibliographic Reference

Foellmi, R, Hepenstrick, C and Zweimüller, J. 2010. 'Non-homothetic preferences, parallel imports and the extensive margin of international trade'. London, Centre for Economic Policy Research.