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Discrete plant-location decisions in an applied general-equilibrium model of trade liberalization

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  • James Markusen
  • Thomas Rutherford

Abstract

Theoretical and applied work in industrial-organization approaches to international trade typically assume either that there are fixed numbers of firms, or that there is free entry and exit with a continuum of firms. This paper makes a first step toward a more realistic approach in which firms face discrete choices about the numbers and locations of their plants. The model is applied to the North American auto industry in the context of the draft North American Free Trade Agreement. Results include: (1) production appears to be excessively geographically diversified initially; (2) autos are produced in fewer locations as trade barriers are lowered; (3) a 'non-monotonicity' case is produced in which a plant is first closed and then reopened as trade barriers are progressively lowered; (4) an example of the misleading nature of marginalist analysis is presented in which plants in Canada and Mexico increase production when locations are fixed but closed down when locations are endogenous and optimized.

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Bibliographic Info

Article provided by Springer in its journal Weltwirtschaftliches Archiv.

Volume (Year): 130 (1994)
Issue (Month): 1 (March)
Pages: 133-151

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Handle: RePEc:spr:weltar:v:130:y:1994:i:1:p:133-151

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Keywords: F12; F23;

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References

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  1. Steven Berry & Vittorio Grilli & F. Lopez-de-Silanes, 1992. "The Automobile Industry and The Mexico-Us Free Trade Agreement," NBER Working Papers 4152, National Bureau of Economic Research, Inc.
  2. Barbara J. Spencer & James A. Brander, 1983. "International R&D Rivalry and Industrial Strategy," NBER Working Papers 1192, National Bureau of Economic Research, Inc.
  3. Herbert E. Scarf, 1989. "Mathematical Programming and Economic Theory," Cowles Foundation Discussion Papers 930, Cowles Foundation for Research in Economics, Yale University.
  4. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  5. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
  6. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, vol. 19(1-2), pages 1-19, August.
  7. Lopez-de-Silanes, Florencio & Markusen, James R. & Rutherford, Thomas F., 1994. "Complementarity and increasing returns in intermediate inputs," Journal of Development Economics, Elsevier, vol. 45(1), pages 101-119, October.
  8. Markusen, James R. & Rutherford, Thomas F. & Hunter, Linda, 1995. "Trade liberalization in a multinational-dominated industry," Journal of International Economics, Elsevier, vol. 38(1-2), pages 95-117, February.
  9. Horstmann, Ignatius J. & Markusen, James R., 1986. "Up the average cost curve: Inefficient entry and the new protectionism," Journal of International Economics, Elsevier, vol. 20(3-4), pages 225-247, May.
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Cited by:
  1. Gordon H. Hanson, 1994. "Localization Economies, Vertical Organization and Trade," NBER Working Papers 4744, National Bureau of Economic Research, Inc.

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