Melitz-and-Ottaviano-(2008)

1、Melitz and Ottaviano (2008)Market Size, Trade, andProductivity (RES) We develop a monopolistically competitive model of trade with firm heterogeneityin terms of productivity differencesand endogenous differences in the “toughness” of competition across marketsin terms of the number and average produ

2、ctivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters

3、in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups).Features of the model Firm heterogeneity in a similar way to Melitz (

4、2003) Endogenous mark-ups developed by Ottaviano, Tabuchi and Thisse (2002). How these features vary across markets of different size. Market size and trade affect the toughness of competitionBasic set up Ottaviano, Tabuchi and Thisse (2002).Linear demand system Solving the budget constraint for the

5、 numeraire consumption , and plugging it to the utility:Indirect utility (Welfare)Production and firm behavior Plugging back the price from demand functionFree entrySpecial case: Pareto distributionSimple derivations can be obtainedLarger markets are characterized by:Short-run case when the number a

6、nd distribution of incumbents are fixedOtherwise the zero cut-off profit condition In this short-run equilibrium, changes in market size do not induce any changes in the distribution of producing firms (cD remains constant), nor in the distribution of prices and mark-ups. All firms adjust their output levels in proportion to the market size change. Only entry in the long run induces inter-firm reallocations (and the associated change in the cut-off cD).