Traditional trade theory features comparative advantage and factor abundance to ac- count for inter-industry trade in models of perfect competition. New trade theory emerged at the end of the 1970s to provide an explanation for the ever larger amount of intra-industry trade using models of imperfect competition. Whereas the gains from trade in traditional models are due to specialization, the new trade theory adds four dif- ferent gains from trade. First, the monopolistic competition model of Krugman (1980) displays a variety e¤ect with trade enabling the consumption of more di¤erent varieties. Second, the model of Krugman (1979) features a scale e¤ect besides a variety e¤ect: trade implies a larger market and the possibility to produce at a larger scale leading to e¢ ciency gains. Third, the model by Ethier (1982) on intermediate goods trade contains a labor division e¤ect: trade enables the use of more intermediate varieties in production. Fourth, the oligopoly model of Brander and Krugman (1983) illuminates the pro-competitive e¤ects from trade. A larger market raises the number of competitors and drives down consumer prices.

J.F. François (Joseph)
Erasmus University Rotterdam
Tinbergen Instituut Research Series
Erasmus School of Economics

Bekkers, E. (2008, September 18). Essays on Firm Heterogeneity and Quality in International Trade (No. 427). Tinbergen Instituut Research Series. Retrieved from