تجارت بین المللی، توزیع درآمد و رفاه International trade, income distribution and welfare

1. Introduction Models of international trade have traditionally used richness on the supply side to gain insight into why countries trade and the likely implications of integration. Any role for consumer heterogeneity is usually suppressed by adopting preferences that are both identical and homothetic. While analytically convenient, these assumptions (coupled with linear pricing) lead models of international trade to effectively ignore some of the most pronounced differences across individuals, regions and countries: income and spending patterns. To date all efforts to gain insight into the consequences of this variation have started by relaxing the assumption of homotheticity, freeing up expenditure shares to depend not just on relative prices but also income levels. In contrast, this paper maintains the assumption of homothetic preferences and focuses on an alternative possibility – firms themselves might be interested in income differences, and may try to exploit this information to raise profits. That is, firms may try to discriminate across the different income groups. To isolate the main implications of this behavior, we adopt the preference and technology structure of Krugman (1980). With homothetic preferences at its heart, this shuts down the mechanisms exploited by the previous literature.1 Furthermore, its single sector structure means that expenditure shares don’t vary with income. Nevertheless, differences in income across consumers translate into different consumer level demand functions. What we explore is the possibility that a firm might find a way to use this information to their advantage. Another benefit of this framework is that we have a very well understood benchmark for thinking about welfare – as set out in Arkolakis et al. (2012). Can we offer anything new in a setting where welfare outcomes are remarkably robust to variation in assumptions on market structure and firm heterogeneity? Despite all this structure intended to suppress any role for consumer heterogeneity and deliver broad welfare results, we show that nevertheless the gains from trade can vary across income groups within a country. The key feature that drives this result is that we allow firms to not only recognize that consumers have different incomes but also be sophisticated enough to exploit this knowledge. The way firm set prices in Krugman (1980) lacks this level of sophistication. In particular firms are assumed to use linear prices, implying they are only interested in the curvature of the residual demand function when formulating their optimal strategies. Moreover, with CES preferences the elasticity of residual demand is constant and the same for all consumers.