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Working paper

Losses from trade in Krugman's model: almost impossible

Igor A. Bykadorov, Gorn A. A., Kokovin S. G., Zhelobodko E. V.
Studying the standard monopolistic competition model with unspecified utility/cost functions, we find necessary and sufficient conditions on the function elasticities, when an expanding market or trade incur welfare losses. Two numerical examples explain why: either excessive or insufficient entry of firms is aggravated by market growth. The variable marginal cost enforces the harmful effect. Still harm looks practically improbable.