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

Foellmi, Reto; Hepenstrick, Christian; Zweimüller, Josef (July 2010). Non-homothetic preferences, parallel imports and the extensive margin of international trade (Discussion Papers 10-09). Bern: Department of Economics

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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.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Föllmi, Reto and Hepenstrick, Christian

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

15 Oct 2020 17:03

Last Modified:

15 Oct 2020 17:03

JEL Classification:

F10, F12, F19

BORIS DOI:

10.7892/boris.145730

URI:

https://boris.unibe.ch/id/eprint/145730

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