Unimodality of Equilibrium Welfare in International Trade Under Monopolistic Competition

We study the classical monopolistic competition trade model. The utility of consumers is additively separable with pro-competitive sub-utility function, the production costs are linear, and the transport cots are “of iceberg type”. We examine the local comparative statics of market equilibrium with respect to transport costs. Earlier we found the following results: (1) (intuitive!) an increase w.r.t. transport costs near free trade leads to a decrease in social welfare; (2) (counter intuitive!) an increase w.r.t. transport costs near autarky leads to an increase in social welfare. Thus, social welfare is non-monotonic. In this regard, a natural question arises about the unimodality of social welfare. We show the unimodality of social welfare for an important class of elementary utility function, namely, for the Behrens–Murata function.