Exchange in markets with heterogeneous agents and trade frictions
This thesis studies the implications of heterogeneity in consumers' incomes or preferences for market equilibrium and welfare in a world characterized by economies of scale and trade frictions. The first chapter studies how the level and the distribution of per capita income affects industrial demand and thus the process of economic development in a closed economy, and the volume of international trade in an integrated world. In a closed economy with given aggregate GDP, countries with intermediate per capita income levels and population sizes have a larger number of industrial sectors than very rich and small or very poor and large countries. Furthermore, income inequality has a positive effect on the level of industrialization in poor economies, whereas the level of industrialization in rich economies is maximized by perfect equality. Finally, when international trade is possible, the volume of trade between two countries is increasing in the similarity of their per capita incomes. The second chapter studies product selection by producers in markets where consumers have idiosyncratic preferences for different varieties of a good and have to search for their preferred variety. I show that the market share of the variety preferred by the majority is always higher than in a frictionless Walrasian market and increases with the severity of search frictions. For given search frictions, a consumer is better off when the group to which she belongs becomes larger, and, for given consumer group sizes, a fall in search frictions benefits minority consumers relatively more than majority consumers. I also study under what conditions mass consumption is a constrained-optimal outcome and the role played by the ability of producers to price discriminate. The third chapter uses a standard monopolistically competitive model of international trade, in which countries have different preferences, to evaluate the often-heard argument that globalization endangers the culture of small countries. In the equilibrium of this model, an increase in economic integration considerably reduces the market share of the varieties typical of the culture of the small country. However, if integration is caused by a reduction in real transport costs, it nevertheless benefits consumers in this country. The model also shows that a country that is not too small relative to the dominant country can increase its welfare by adopting a limited level of trade protection, whereas for a very small country free trade is optimal. This model can be used to evaluate the economic implications of the principle of "cultural exception", invoked by France to protect its film industry.