Non-homothetic Preferences, Parallel Imports And The Extensive Margin Of International Trade
The authors study international trade in a model where consumers have non-homothetic preferences and where household income restricts the extensive margin of consumption. In equilibrium, monopolistic producers set high (low) prices in rich (poor) countries but a threat of parallel trade restricts the scope of price discrimination between countries. The threat of parallel trade allows differences in per capita incomes to have a strong impact on the extensive margin of trade, whereas differences in population sizes have a weaker effect. They also show that the welfare gains from trade liberalization are biased towards rich countries. They extend the model to more than two countries; to unequal incomes within countries; and to more general specifications of non-homothetic preferences. The basic results are robust to these extensions.