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International Vertical Specializations, Imperfect Competition and Welfare

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  • Goh, Ai Ting
  • Olivier, Jacques
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    Abstract

    This Paper looks at the impact of international vertical specialization when the final good industry is imperfectly competitive. Final goods are assembled out of different fragments. In the absence of international vertical specialization all fragments required to produce a given final good must be produced in the same country. International vertical specialization unambiguously reduces the costs of production of all final good producers, albeit not necessarily in the same proportion. If the cost of production of a less efficient producer is reduced to a lesser extent than that of a more efficient producer, vertical specialization may lead to exit in the final good industry. This anti-competitive effect may be strong enough that international vertical specialization leads to a Pareto inferior outcome. On the other hand, we can characterize two sets of policies, which, combined with vertical specialization, are Pareto improving compared to autarky regardless of consumer preferences and of the form of competition in the final good industry.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4311.

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    Date of creation: Mar 2004
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    Handle: RePEc:cpr:ceprdp:4311

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    Related research

    Keywords: anti-competitive effect of trade; fragmentation; imperfect competition; vertical specialization; welfare;

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    1. Fujita, Masahisa & Thisse, Jacques-Francois, 2004. "Globalization and the Evolution of the Supply Chain: who gains and who loses?," IDE Discussion Papers 5, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. Yongmin Chen & Jota Ishikawa & Zhihao Yu, 2002. "Trade Liberalization and Strategic Outsourcing," Carleton Economic Papers 02-12, Carleton University, Department of Economics, revised Jul 2004.
    3. Francois, Patrick & van Ypersele, Tanguy, 2002. "On the protection of cultural goods," Journal of International Economics, Elsevier, vol. 56(2), pages 359-369, March.
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