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GTAP Resource #7257

"Small group monopolistic competition in a GTAP model: meeting the Markusen challenge"
by Dixon, Peter and Maureen Rimmer

Industries dominated by a few large firms are now a common feature of many economies. Statistica lists 20 industries in the U.S. in which the top 4 firms account for more than 88% of sales. Grullon et al. (2019) document a rapid increase in the concentration of U.S. industries since the 1990s. They show that industries with the largest increases in product-market concentration show higher profit margins than other industries. They find no evidence that increased concentration has been accompanied by productivity-enhancing scale economies.

Despite these developments, all applications of GTAP models of which we are aware assume that industries are composed of large numbers of small firms. In most cases, it is assumed that the industries are perfectly competitive. In some cases, Melitz-style large-group monopolistic competition (LGMC) is assumed.

In his recent JGEA article, Markusen (2023) attacks the LGMC setup. He says:
“It is bafflingly inconsistent to assume that firms produce with increasing returns to scale, yet have no mass. This has remained true in almost all papers modeling heterogeneous firms, where the most productive firms are very large relative to their industry average.”

Markusen advocates for the adoption of small group monopolistic competition (SGMC) in which industries have high levels of concentration and are aware of the likely behaviour of their rivals.

In this paper, we describe a version of GTAP in which some industries are modeled as SGMC. Unlike Markusen, we will allow for barriers to entry and pure profits. We think these are potentially important explanators of inflation in some countries, and reductions in many countries in the labor-share of GDP. We also suspect that recognition in a CGE model of SGMC will lead to larger and more realistic estimates of the benefits of freer trade and relaxed restrictions on FDI.

Resource Details (Export Citation) GTAP Keywords
Category: 2024 Conference Paper
Status: Not published
By/In: Presented during the 27th Annual Conference on Global Economic Analysis (Fort Collins, Colorado, USA)
Date: 2024
Version: Version 1
Created: Dixon, P. (4/14/2024)
Updated: Dixon, P. (4/14/2024)
Visits: 102
- Non-competitive markets
- Bridging CGE and new quantitative trade (NQT) literature
- Model extension/development

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