International trade, income distribution and welfare

Abstract

This paper studies the relationship between income distribution and international integration in a canonical trade setting with one change. In the standard model prices are solely a function of (constant) marginal costs and (constant) elasticities, implying that information on individual incomes are of no value to a firm. To allow a more realistic role for consumer level information, a firm's strategy space is expanded to include non-linear prices. Now profit maximizing firms use information on income distribution to design a product for each income class and set prices to induce each group to optimally select the appropriate option. Equilibrium involves designs below the first best for low ..