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Fragmentation and Welfare in Monopolistic Competition

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  • Morihiro Yomogida

Abstract

We examine the welfare effect of fragmentation with a general-equilibrium model of monopolistic competition. Using the efficiency property of monopolistic competition models, we develop a diagram that is used to show that fragmentation of production arises, i.e. firms in a country specialize in developing blueprints and out-source the manufacturing of their products to the other country. Such fragmentation allows countries to benefit from trade due to two different sources: comparative advantage and product diversity. We show how these two sources result in gains from trade induced by this production fragmentation. Copyright © 2010 Blackwell Publishing Ltd.

Suggested Citation

  • Morihiro Yomogida, 2010. "Fragmentation and Welfare in Monopolistic Competition," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 531-539, August.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:3:p:531-539
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