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International Trade, Migration And Investment With Horizontal Product Differentiation And Free Entry And Exit Of Firms

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  • Hernán Vallejo G

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Abstract

This paper builds on a circular road model of the world with horizontal product differentiation and free entry and exit of firms, to derive results that can be applied in industrial organization, international trade and political economy. The model shows that freer international trade increases welfare -with ideal variety preferences through the exploitation of economies of scale and better allocative efficiency; that all participating countries gain from trade, and that smaller countries have more to win from free trade than larger countries. The model also explains that there may be adjustment costs when liberalizing trade and thus, political resistance to trade liberalization. International migration can also be analyzed with the model, showing the possibility of suboptimal migration flows and political barriers to the exit of national citizens. The model suggests that foreign direct investment will be welfare improving for the source country in the short run, and for the receiving country in the long run. Finally, the model provides a micro foundation for the use of demand curves with constant and negative slopes.

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File URL: http://economia.uniandes.edu.co/publicaciones/d2005-62.pdf
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Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 002917.

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Length: 19
Date of creation: 05 Nov 2005
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Handle: RePEc:col:000089:002917

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  1. Schmitt, Nicolas, 1995. "Product Imitation, Product Differentiation and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 583-608, August.
  2. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  3. B.Curtis Eaton & Richard G. Lipsey, 1972. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Working Papers 87, Queen's University, Department of Economics.
  4. BOCCARD, Nicolas & WAUTHY, Xavier, 1997. "Export restraints and horizontal product differentiation," CORE Discussion Papers 1997082, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Luís M. B. Cabral, 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, January.
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