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Firm Heterogeneity, Home Market Effect, and Gravity Equation in an Oligopoly

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  • Kenji Fujiwara

    (Kwansei Gakuin University)

Abstract

Developing a two-country oligopoly model with firm heterogeneity, this paper examines the relationship among market size, the Home Market Effect, and the gravity equation. We show that in the long-run with free entry, the Home Market Effect holds, namely, more firms locate in the large-sized country. This leads the large-sized country to be a net exporter of the oligopoly good. In the short-run with restricted entry, the Home Market Effect no longer holds and the large-sized country becomes a net importer of the oligopoly good. These results suggest that the theoretical predictions of Feenstra et al. (Can J Econ 34(2):430–447, 2001) survive firm heterogeneity.

Suggested Citation

  • Kenji Fujiwara, 2024. "Firm Heterogeneity, Home Market Effect, and Gravity Equation in an Oligopoly," Open Economies Review, Springer, vol. 35(5), pages 1115-1131, November.
    • Handle: RePEc:kap:openec:v:35:y:2024:i:5:d:10.1007_s11079-024-09760-x
    DOI: 10.1007/s11079-024-09760-x
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    More about this item

    Keywords

    Oligopoly; Firm heterogeneity; Home market effect; Gravity equation;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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