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Sunk Costs and Trade Liberalisation

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  • Motta, Massimo

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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Bibliographic Info

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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Cited by:
  1. Lambertini, L. & Rossini, G., 1997. "Vertical Differentiation, Trade and Endogenous Common Standards," ASSET - Instituto De Economia Publica 160, ASSET (Association of Southern European Economic Theorists).
  2. Fertő, Imre & Hubbard, Lionel J., 2003. "A vertikálisan és horizontálisan differenciált mezőgazdasági termékek ágazaton belüli kereskedelme Magyarország és az Európai Unió Között
    [Intra-industry trade in vertically and hori
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 152-163.
  3. Fertő, Imre, 2006. "Vertikálisan és horizontálisan differenciált, ágazaton belüli kereskedelem az Európai Unió tejpiacán
    [Trade within vertically and horizontally differentiated industries on the milk market
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 526-539.
  4. L. Lambertini, 2002. "the Specialization of Production and Labour Mobility Under Endogenous Differentiation," Working Papers 453, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Cabrales, Antonio & Motta, Massimo, 2001. "Country asymmetries, endogenous product choice and the timing of trade liberalization," European Economic Review, Elsevier, vol. 45(1), pages 87-107, January.
  6. 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.
  7. THARAKAN , Joe & THISSE, Jacques-François, . "The importance of being small. Or when countries are areas and not points," CORE Discussion Papers RP -1542, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Andaluz, Joaquin, 2000. "On protection and vertical product differentiation," Regional Science and Urban Economics, Elsevier, vol. 30(1), pages 77-97, January.
  9. Jofre-Bonet, Mireia, 2000. "Health care: private and/or public provision," European Journal of Political Economy, Elsevier, vol. 16(3), pages 469-489, September.
  10. 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.
  11. Tharakan, J., 2001. "Revisiting “On nations’ size and transportation costs”," CORE Discussion Papers 2001032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Carmela Martin & Jose V. Blanes, 1999. "The Nature and Causes of Intra-Industry Trade: Back to the Comparative Advantage Explanation? The Case of Spain," European Economy Group Working Papers 1, European Economy Group.
  13. Stefan Lutz & Mina Baliamoune-Lutz, 2003. "Mutual Recognition of National Minimum Quality Standards may Support International Convergence," Journal of Industry, Competition and Trade, Springer, vol. 3(4), pages 293-311, December.
  14. Constantatos, Christos & Perrakis, Stylianos, 1995. "Différenciation verticale et structure du marché," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(1), pages 71-98, mars.
  15. Cabrales, Antonio & Motta, Massimo, 1996. "Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization," CEPR Discussion Papers 1326, C.E.P.R. Discussion Papers.
  16. 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, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  17. 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).

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