Monopolistic Competition and International Trade: Reconsidering the Evidence

TLDR

The study tests whether trade flows between OECD and non‑OECD countries align with monopolistic competition models, examining both total trade volumes and intra‑industry trade shares. The results cast doubt on the empirical success of monopolistic competition trade models.

Abstract

We test some propositions about international trade flows that are derived from models of monopolistic competition developed by Elhanan Helpman and Paul Krugman. We investigate whether the volume of trade between OECD countries is consistent with the predictions of a model in which all trade is intraindustry trade in differentiated products. We then repeat the test with non-OECD countries. We also investigate whether the share of intraindustry trade is consistent with a more general theoretical model in which some, but not all, trade is intraindustry trade. Our results lead us to question the apparent empirical success of these models.