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International Trade, Migration And Investment With Horizontal Product Differentiation And Free Entry And Exit Of Firms

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  • Hern√°n Vallejo G

Abstract

This paper builds on a circular road model of the world with horizontal product differentiation and free entry and exit of firms, to derive results that can be applied in industrial organization, international trade and political economy. The model shows that freer international trade increases welfare -with ideal variety preferences through the exploitation of economies of scale and better allocative efficiency; that all participating countries gain from trade, and that smaller countries have more to win from free trade than larger countries. The model also explains that there may be adjustment costs when liberalizing trade and thus, political resistance to trade liberalization. International migration can also be analyzed with the model, showing the possibility of suboptimal migration flows and political barriers to the exit of national citizens. The model suggests that foreign direct investment will be welfare improving for the source country in the short run, and for the receiving country in the long run. Finally, the model provides a micro foundation for the use of demand curves with constant and negative slopes.

Suggested Citation

  • Hern√°n Vallejo G, 2005. "International Trade, Migration And Investment With Horizontal Product Differentiation And Free Entry And Exit Of Firms," Documentos CEDE 2917, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:002917
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    References listed on IDEAS

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    1. Cabral, Luis M. B., 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, December.
    2. Boccard, N. & Wauthy, Xavier, 1997. "Export Restraints and Horizontal Product Differentiation," LIDAM Discussion Papers IRES 1997024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Sep 1997.
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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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