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Cost Competition, Fragmentation and Globalization

  • Barbara Dluhosch
  • Michael Burda

This paper proposes a model in which the removal of barriers to trade and factor mobility is associated with endogenous fragmentation of the value-added chain. Fragmentation is the outcome of cost competition  the profit-maximizing choice of cost structure by monopolistically com-petitive firms. An expansion of the integrated trading area can induce globalization not only in the horizontal dimension associated with love-of-variety preferences, but also in a vertical dimension as firms vary specialization of production stages. While increased trade is likely to in-duce fragmentation when the number of firms is fixed, free entry can either reverse or intensify this result.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 393.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_393
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