Market Integration, Choice of Technology, and Welfare
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. Copyright © 2010 Blackwell Publishing Ltd.
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Volume (Year): 18 (2010)
Issue (Month): 2 (05)
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