DP7939 Non-homothetic preferences, parallel imports and the extensive margin of international trade
Author(s): | Reto Foellmi, Christian Hepenstrick, Josef Zweimüller |
Publication Date: | August 2010 |
Keyword(s): | extensive margin of trade, Heterogenous markups, non-homothetic preferences, parallel imports |
JEL(s): | F10, F12, F19 |
Programme Areas: | Industrial Organization, International Trade and Regional Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=7939 |
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.