Estimating the Pro‐Competitive Effect and Variety Gains Using Firm‐Level Data

ABSTRACT Using Chinese firm‐level data, this article constructs a theoretical model to estimate the welfare effects of domestic and international trade through pro‐competitive effect and variety change. We find that from 2000 to 2013, domestic and international trade have increased Chinese consumer welfare by 1.44%. The pro‐competitive effect and variety gains account for 59% and 41% of the overall welfare gains, respectively. Further decomposition of variety gains shows that variety growth effect increases Chinese consumer welfare by 1.13%, while variety crowding effect causes welfare to decrease by 0.51%. In addition, we also find that domestic trade generates greater consumer welfare than international trade. The estimation results at the CIC three‐digit industry level show that the ‘communication equipment’ industry has the largest trade welfare. Finally, we find that ignoring industry heterogeneity underestimates trade welfare, and that short‐run dynamic trade welfare is greater than long‐run static trade welfare.