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Revisiting “On nations’ size and transportation costs”

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  • THARAKAN, J.
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    Abstract

    In international trade as well in the "New Economic Geography", country size is represented solely by the size of the country's population. A notable exception is the paper by Shachmurove and Spiegel (1995). Applying the Hotelling model to international trade and using the geographical interpretation of the Hotelling line, the authors propose a model where countries differ not only in population size but also in terms of their geographical extent. However, under certain assumptions on the locations of the firms, a pure strategy Nash equilibrium does not exist. In this paper, an alternative way to circumvent this existence problem and to make the analysis possible is presented. The pure strategy Nash equilibrium is restored by changing the assumption on the pricing policies used by the firms. The analysis indicates that while the small country gains from free trade the overall welfare of the larger country is unaffected by the opening of the border. The analysis is also extended to include a discussion of the long run equilibrium locations of firms in the integrated market. The importance of both the population and the geographical size of the countries are shown to be determining in establishing the effect of free trade.

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    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2001032.

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    Date of creation: 00 Jun 2001
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    Handle: RePEc:cor:louvco:2001032

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    1. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-37, March.
    2. McLEOD, W.B. & NORMAN, G. & THISSE, J.-F., . "Price discrimination and equilibrium in monopolistic competition," CORE Discussion Papers RP -828, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Keith Head & Thierry Mayer, 2000. "Non-Europe: The magnitude and causes of market fragmentation in the EU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 284-314, June.
    4. Greenhut, Melvin L, 1981. "Spatial Pricing in the United States, West Germany and Japan," Economica, London School of Economics and Political Science, vol. 48(189), pages 79-86, February.
    5. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Hurter, Arthur Jr & Lederer, Phillip J., 1985. "Spatial duopoly with discriminatory pricing," Regional Science and Urban Economics, Elsevier, vol. 15(4), pages 541-553, November.
    7. Motta, M., 1991. "Sunk costs and trade liberalisation," CORE Discussion Papers 1991027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Holger C. Wolf, 1997. "Patterns of Intra- and Inter-State Trade," NBER Working Papers 5939, National Bureau of Economic Research, Inc.
    9. Shachmurove, Yochanan & Spiegel, Uriel, 1995. "On Nations' Size and Transportation Costs," Review of International Economics, Wiley Blackwell, vol. 3(2), pages 235-43, June.
    10. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
    11. 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.
    12. 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.
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