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Market Integration, Choice of Technology, and Welfare

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  • Jørgen Drud Hansen
  • Jørgen Ulff‐Møller Nielsen

Abstract

This paper develops an international trade model where firms in a duopoly may diversify their technologies for strategic reasons. The firms face the same set of technologies given by a tradeoff between marginal costs and fixed costs, but depending on trade costs firms may choose different technologies. Market integration may induce a technological restructuring where firms either diversify their technologies or switch to a homogeneous technology. In general, market integration improves welfare. However, a small decrease of trade costs which induces a switch from heterogeneous technologies to a homogeneous technology may locally reduce global welfare. The model also shows that productivity differences lead to intra‐industry firm heterogeneity in size and exports similar to the “new–new” trade models with monopolistic competition.

Suggested Citation

  • Jørgen Drud Hansen & Jørgen Ulff‐Møller Nielsen, 2010. "Market Integration, Choice of Technology, and Welfare," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 229-242, May.
    • Handle: RePEc:bla:reviec:v:18:y:2010:i:2:p:229-242
    DOI: 10.1111/j.1467-9396.2010.00874.x
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    References listed on IDEAS

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    6. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
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    Cited by:

    1. Huang, Weihong & Zhang, Yang, 2018. "Technological gap and heterogeneous oligopoly," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 1-7.

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