Integrated versus segmented markets: Implications for export pricing and welfare

Abstract

Abstract This paper challenges the common assumption of perfect market segmentation in models based on monopolistic competition. We develop a tractable approach to analyze export entry and pricing decisions of firms and show that the trade costs triangle condition (absence of potential re‐exporting arbitrage) imposes constraints on firm‐level export prices, which have first‐order implications for trade and welfare. We provide empirical evidence that the triangle condition is violated in the data and quantify the importance of these violations in a general equilibrium setting.