The "home market effect" (HME) is an essential topic of the new trade theory. Assuming the transport costs only for the manufacturing goods, Krugman (1980) shows that the country with bigger market size is a net exporter. The assumption of free transport of the agricultural good was shown mattering a great deal rather than being innocuous by Davis (1998). Particularly, when manufacturing and agricultural goods have identical transport costs, the HME disappears. However, we find that the homogeneous-agricultural-good assumption in Davis' model derives the discontinuity of inverse demand functions, which causes the disappearance of the HME. After establishing an analytical solvable model and assuming two differentiated agricultural goods in two countries, we find that the HME does exist even if the transport cost of the agricultural goods is positive.
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"On the Pervasiveness of Home Market Effects,"
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Other versions:
Ottaviano, Gianmarco & Thisse, Jacques-Francois, 2004.
"Agglomeration and economic geography,"
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"Agglomeration and Trade Revisited,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 409-436, May.
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OTTAVIANO, Gianmarco & TABUCHI, Takatoshi & THISSE, Jacques-Franois, 1999.
"Agglomeration and trade revisited,"
CORE Discussion Papers
1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-Francois Tissse, 1999.
"Agglomeration and Trade Revisited,"
CIRJE F-Series
CIRJE-F-65, CIRJE, Faculty of Economics, University of Tokyo.
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