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This paper analyzes antidumping (AD) policies in a two-country model with heterogeneous firms. One country enforces AD so harshly that firms exporting to the country choose not to dump. In the short run, the country enforcing AD experiences reduced competition to the benefit of local firm and detriment of local consumers, but in the long run AD protection attracts new firms, increasing competition and consumer welfare. In the country's trading partner, competition initially increases: Some firms give up exporting, but those that remain will lower their domestic prices. Consumers therefore benefit in the short run. In the long run, however, fewer firms will enter the unprotected country, and competition will eventually decrease, resulting in welfare losses.

With Melitz (2003) as the seminal paper, models of monopolistic competition with heterogeneous firms have become one of the most prominent frameworks in international trade, for both theoretical and empirical research. So far, however, trade policies have received only a rather crude treatment in the framework, trade liberalizations are invariably reduced to fewer exported goods disappearing in transit (lower “iceberg costs” of exporting). This paper will mend this gap by examining how antidumping policies may affect an economy with heterogeneous firms. The motivations for picking antidumping (AD) as the particular policy to treat theoretically are clear. As Zanardi (2006) documents, the number of countries with AD legislation rose from 37 in 1980 to 98 in 2003, and the number of annual investigations more than doubled over this period, whereas tariffs have been steadily declining. The results of Vandenbussche and Zanardi (2008) even indicate that countries replace regular tariffs with AD. All this points to AD as a trade policy of rising importance. Moreover, Konings and Vandenbussche (2008, 2009) document that responses to AD are firm-specific, warranting theoretical investigations at the firm-level. The theoretical results of this paper are derived in the two-country model of Melitz and Ottaviano (2008), introduced in Section 2.1 and 2.2. To disentangle how both countries in the two-country model are affected by one country's AD policy, a unilateral AD regime is analyzed, where one country (Foreign) has AD legislation, whereas the other country (Home) has not. The specific AD regime analyzed is what we may call a “credible threat” policy regime: The risk and costs of an AD petition are large enough that all firms exporting to Foreign choose to behave in a manner where they avoid infringing with the AD legislation. Although such a scenario admittedly is extreme, Vandenbussche and Zanardi (2010) find that threat effects of AD are quite real for countries that use AD extensively. From a theoretical perspective, the credible threat scenario also has the advantage that it makes AD policies resemble changes in the iceberg cost parameter, allowing a direct comparison and an assessment of how good the iceberg approximation may be. In this scenario, firms in Home that wish to export must price such that they cannot be found guilty of dumping by Foreign's AD authorities, they export subject to a “no-dumping constraint”. As outlined in Section 2.4, this constraint will make exporting firms cut their domestic price to be able to set a lower export price. The further results in the paper are consequences of this altered pricing behavior. For exporters that earn relatively little export profits, it may be more profitable to stop exporting altogether. A first benefit of the heterogeneous firms framework is this result on how AD affects export selection in slightly more subtle ways than an iceberg cost does, Section 2.5 provides the details. The immediate consequences of Foreign's AD regime are analyzed in Section 2.6. Because the firms in Home that still export reduce their domestic price, competition increases in Home, and the least productive firms there may wish to temporarily shut down production. In Foreign, the reduced imports mean that all firms increase domestic production and profits. Consumers in Home gain, while consumers in Foreign lose. When Foreign's AD policy is permanent, however, this situation will not endure: It is profitable for new firms to enter Foreign's protected market, and less attractive to set up a firm in Home. Section 2.7 analyzes what happens in the long run, after these changes in entry patterns have taken place. In Foreign, new entrants will more than compensate for the lower imports from Home. Competition will increase, driving average productivity up and bringing welfare gains to Foreign's consumers. In Home, fewer firms will enter, competition will decrease as will average productivity, and home's consumers will suffer welfare losses. The heterogeneous firms framework enables us to track how the effects of Foreign's AD regime depend on how productive firms are: In Foreign, all firms benefit in the short run from reduced domestic competition, but the firms that are productive enough to export actually lose on their export market. These results are resemble Konings and Vandenbussche (2009)'s empirical findings. In the long run, however, the predictions are exactly reversed: The exporting firms benefit from lower competition in Home, whereas weaker firms are worse off because of the increased domestic competition. In Home, exporters lose both in the short and the long run, but while unproductive firms suffer in the short run, this type of firms benefit from reduced competition in the long run. Section 3 discusses wider implications of the analysis. I first compare the effects of AD policy to customary modeling of trade restrictions: although the long-run effects are similar, AD hurts the trading partner somewhat less, because the exporters to an AD regime will lower their domestic prices. I afterwards consider what policy implications it might have that countries have a unilateral incentive to enforce AD. One could fear a scenario where all countries enforce AD against each other, but empirical studies suggest that we are currently not in that situation, only some countries enforce AD heavily. Although this paper is the first to show how AD may lead to welfare gains in the long run, it is in order to discuss whether some of the results derived here could be obtained in other models, which I do by the end of Section 3.3

This paper has examined the effects of AD in a monopolistic competition model with heterogeneous firms. In the specific policy regime analyzed, AD in one of the two countries is so heavily enforced that firms exporting to the country set prices in a way that avoids any scrutiny by AD authorities. The heterogeneous firms framework provides a series of novel effects of AD: The direct effects are that exporters in Home (the unprotected country) will either lower their domestic prices to be able to set lower export prices, or they will stop exporting altogether. In the short run, these lower domestic prices hurt Home's non-exporting firms, too, but consumers in Home gain in the short run from the increased competition. In the long run, however, fewer firms will enter Home because of the reduced export potential, and competition will fall. In the long run, the least productive firms gain from this reduced competition, whereas the productive firms still suffer from the reduced export potential. Consumers in Home lose in the long run, competition is lower and there are fewer varieties. In Foreign, the AD-protected country, competition falls in the short run, because of the reduction in imports. All local firms have higher domestic sales, but exporters lose some export profits because of the lower prices in Home. In the long run, however, new firms will enter Foreign, eventually increasing competition above what is was without AD protection. Foreign's least productive firms therefore have lower profits, whereas exporters gain from decreased competition in Home. Increased competition and more varieties raise the welfare of Foreign's consumers. These results show how analyzing AD with heterogeneous firms and allowing for long-run industry reallocations may provide new policy insights, and it also raises concerns that countries may use AD policies to enjoy welfare gains on expense of their trading partners.