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The Importance of Being Small. Or When Countries are Areas and not Points

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Author Info
Tharakan, Joe
Thisse, Jacques-François

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Abstract

Market size and transport costs are important ingredients of international trade. We propose to look at these issues from a different perspective. Using a Hotelling duopoly model with quadratic transport costs, we analyse the welfare effects of international trade between two countries that differ only in size. Our results indicate that in most cases free trade will lead to a decrease in prices. Furthermore, the firm of the small country will benefit from market expansion. Finally, the model predicts that the small country benefits from a move towards free trade whereas the opening to trade may hurt the large country.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2938.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2938

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Related research
Keywords: geographical nation size; international Trade; mill pricing; spatial competition;

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
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  4. Ohsawa, Yoshiaki, 1999. "Cross-border shopping and commodity tax competition among governments," Regional Science and Urban Economics, Elsevier, vol. 29(1), pages 33-51, January. [Downloadable!] (restricted)
  5. Shachmurove, Yochanan & Spiegel, Uriel, 1995. "On Nations' Size and Transportation Costs," Review of International Economics, Blackwell Publishing, vol. 3(2), pages 235-43, June.
  6. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Economides, Nicholas, 1984. "The principle of minimum differentiation revisited," European Economic Review, Elsevier, vol. 24(3), pages 345-368, April. [Downloadable!] (restricted)
  9. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1027-56, November.
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  10. 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. [Downloadable!] (restricted)
  11. Motta, Massimo, 1992. "Sunk Costs and Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 102(412), pages 578-87, May. [Downloadable!] (restricted)
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  1. Hartmut Egger & Peter Egger, 2004. "Outsourcing and Trade in a Spatial World," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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