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Sunk Costs and Trade Liberalisation

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  • Motta, Massimo

Abstract

A model of vertical product differentiation is applied to the study of trade between two countries of differing sizes. Firms in the small country choose lower-quality products in autarky. Unlike A. Shaked and J. Sutton (1984), welfare effects of trade are fully analyzed and shown to depend on the degree of sunkness of costs. If firms have not sunk costs, losses from trade may arise for the small country in the short run (when quality is fixed) and for the large country in the long run (when quality is variable). If costs are sunk, both countries always gain from trade. Copyright 1992 by Royal Economic Society.

Suggested Citation

  • Motta, Massimo, 1992. "Sunk Costs and Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 102(412), pages 578-587, May.
  • Handle: RePEc:ecj:econjl:v:102:y:1992:i:412:p:578-87
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    Cited by:

    1. Tharakan, Joe & Thisse, Jacques-Francois, 2002. "The importance of being small. Or when countries are areas and not points," Regional Science and Urban Economics, Elsevier, vol. 32(3), pages 381-408, May.
    2. Fertő, Imre & Hubbard, Lionel J., 2003. "A vertikálisan és horizontálisan differenciált mezőgazdasági termékek ágazaton belüli kereskedelme Magyarország és az Európai Unió Között
      [Intra-industry trade in vertically and horizontally differ
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 152-163.
    3. L. Lambertini & G. Rossini, 1996. "Vertical Differentiaiton, Trade and Endogenous Common Standards," Working Papers 263, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Alessandro Turrini, 2000. "High-quality bias in vertically differentiated oligopolies—a note on skills, trade, and welfare," Journal of Economics, Springer, vol. 71(2), pages 133-147, June.
    5. José Blanes & Carmela Martín, 2000. "The nature and causes of intra-industry trade: Back to the comparative advantage explanation? The case of Spain," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(3), pages 423-441, September.
    6. Alberto Salvo, 2010. "Sequential Cross-border Mergers in Models of Oligopoly," Economica, London School of Economics and Political Science, vol. 77(306), pages 352-383, April.
    7. Andaluz, Joaquin, 2000. "On protection and vertical product differentiation," Regional Science and Urban Economics, Elsevier, vol. 30(1), pages 77-97, January.
    8. Fertő, Imre, 2006. "Vertikálisan és horizontálisan differenciált, ágazaton belüli kereskedelem az Európai Unió tejpiacán
      [Trade within vertically and horizontally differentiated industries on the milk market of the Eu
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 526-539.
    9. Antonio Cabrales & Massimo Motta, 1996. "Country asymmetries, endogenous product choice and the speed of trade liberalization," Economics Working Papers 259, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1998.
    10. Constantatos, Christos & Perrakis, Stylianos, 1995. "Différenciation verticale et structure du marché," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(1), pages 71-98, mars.
    11. Tharakan, J., 2001. "Revisiting “On nations’ size and transportation costs”," CORE Discussion Papers 2001032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. L. Lambertini, 2002. "the Specialization of Production and Labour Mobility Under Endogenous Differentiation," Working Papers 453, Dipartimento Scienze Economiche, Universita' di Bologna.
    13. Jofre-Bonet, Mireia, 2000. "Health care: private and/or public provision," European Journal of Political Economy, Elsevier, vol. 16(3), pages 469-489, September.
    14. Imre Ferto & Lionel J. Hubbard, 2002. "Intra-industry trade in horizontally and vertically differentiated agrifood products between Hungary and the EU," IEHAS Discussion Papers 0202, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    15. Cabrales, Antonio & Motta, Massimo, 2001. "Country asymmetries, endogenous product choice and the timing of trade liberalization," European Economic Review, Elsevier, vol. 45(1), pages 87-107, January.
    16. BACCHIEGA, Emanuele, 2004. "Vertical differentiation, wage bargaining and intra-industry trade liberalization," CORE Discussion Papers 2004028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    17. Olivier Gaussens & Sophie Lecostey, 1994. "Politique technologique et intégration mondiale," Revue Économique, Programme National Persée, vol. 45(3), pages 459-474.
    18. Alberto Salvo, 2004. "A General Analysis of Sequential Merger Games with an Application to Cross-Border Mergers," STICERD - Economics of Industry Papers 36, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    19. Stefan Lutz & Mina Baliamoune-Lutz, 2003. "Mutual Recognition of National Minimum Quality Standards may Support International Convergence," Journal of Industry, Competition and Trade, Springer, vol. 3(4), pages 293-311, December.
    20. Miao, Zhuang & Long, Ngo Van, 2017. "Multiple-Quality Cournot Oligopoly and the Role of Market Size," MPRA Paper 82095, University Library of Munich, Germany.

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