Trade liberalization with granular firms

Relying on rich firm-product Danish data, we document that the bulk of manufacturing revenue comes from industries where large firms and numerous insignificant firms coexist. Given the importance of this market structure in the aggregate, we study its implications for gains of trade by embedding a set of oligopolistic firms into a monopolistic-competition model. In this setting, the idiosyncratic features of large firms become crucial for gains of trade, given the granular importance of their profits for aggregate income. In particular, gains of trade are negatively affected when a large firm has a pronounced home bias, since trade liberalization reduces its profit by increasing domestic competition. A calibration for Denmark reflects this feature: trade liberalization raises the profits of almost all large firms, but the fall in profit of one large firm almost completely offsets the gains in income from the profit channel.