Mixed Market Structures, Concentration and Welfare

Shih-Jye Wu and Chung-Hsing Hsieh


This paper explores endogenous firm efficiency with extensive margins within a framework where large oligopolists coexist with a monopolistically competitive fringe. The adoption of firm-specific R&D gives adopters non-negligible market power over non-adopters, which enables them to expand through exporting, extensive margins and charging higher markups. We study the comparative statics to examine the effects of trade on firm behaviors and market outcomes. The model predicts that trade liberalization increases the R&D of exporters serving foreign markets, which in turn increases domestic sales by widening domestic product lines. Trade-driven increases in market concentration and aggregate markups may be beneficial for the economy by reallocating economic resources and profit towards high-efficiency firms.