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Sunk Costs and Trade Liberalisation

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Author Info
Motta, Massimo

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Abstract

A model of vertical product differentiation is applied to the study of trade between two countries of differing sizes. Firms in the small country choose lower-quality products in autarky. Unlike A. Shaked and J. Sutton (1984), welfare effects of trade are fully analyzed and shown to depend on the degree of sunkness of costs. If firms have not sunk costs, losses from trade may arise for the small country in the short run (when quality is fixed) and for the large country in the long run (when quality is variable). If costs are sunk, both countries always gain from trade. Copyright 1992 by Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 102 (1992)
Issue (Month): 412 (May)
Pages: 578-87
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Handle: RePEc:ecj:econjl:v:102:y:1992:i:412:p:578-87

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  1. Tharakan, Joe & Thisse, Jacques-François, 2001. "The Importance of Being Small. Or When Countries are Areas and not Points," CEPR Discussion Papers 2938, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Tharakan, J., 2001. "Revisiting ÒOn nationsÕ size and transportation costsÓ," CORE Discussion Papers 2001032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  3. José Blanes & Carmela Martín, 2000. "The nature and causes of intra-industry trade: Back to the comparative advantage explanation? The case of Spain," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(3), pages 423-441, 09. [Downloadable!] (restricted)
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  4. BACCHIEGA, Emanuele, 2004. "Vertical differentiation, wage bargaining and intra-industry trade liberalization," CORE Discussion Papers 2004028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  5. Imre Ferto & Lionel J. Hubbard, 2002. "Intra-industry trade in horizontally and vertically differentiated agrifood products between Hungary and the EU," IEHAS Discussion Papers 0202, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
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  6. Lutz, Stefan, 2003. "Mutual Recognition of National Minimum Quality Standards may Support International Convergence," ZEW Discussion Papers 03-17, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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  7. Alberto Salvo, 2004. "A General Analysis of Sequential Merger Games with an Application to Cross-Border Mergers," STICERD - Economics of Industry Papers 36, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  8. Alessandro Turrini, 2000. "High-quality bias in vertically differentiated oligopolies—a note on skills, trade, and welfare," Journal of Economics, Springer, vol. 71(2), pages 133-147, June. [Downloadable!] (restricted)
  9. Antonio Cabrales & Massimo Motta, 1996. "Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization," Economics Working Papers 259, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1998. [Downloadable!]
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