Trade liberalization with granular firms

Martin Alfaro*, Frederic Warzynski

*Corresponding author for this work

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review


Relying on rich firm-product Danish data, we document that the bulk of manufacturing revenue comes from industries where large firms and numerous insignificant firms coexist. Given the importance of this market structure in the aggregate, we study its implications for gains of trade by embedding a set of oligopolistic firms into a monopolistic-competition model. In this setting, the idiosyncratic features of large firms become crucial for gains of trade, given the granular importance of their profits for aggregate income. In particular, gains of trade are negatively affected when a large firm has a pronounced home bias, since trade liberalization reduces its profit by increasing domestic competition. A calibration for Denmark reflects this feature: trade liberalization raises the profits of almost all large firms, but the fall in profit of one large firm almost completely offsets the gains in income from the profit channel.

Original languageEnglish
Article number105650
JournalEconomic Modelling
Publication statusPublished - Dec 2021


  • Firm heterogeneity
  • Gains of trade
  • Granularity
  • Leaders
  • Oligopolistic firms


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