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International Vertical Specializations, Imperfect Competition and Welfare

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  • Goh, Ai Ting
  • Olivier, Jacques

Abstract

This Paper looks at the impact of international vertical specialization when the final good industry is imperfectly competitive. Final goods are assembled out of different fragments. In the absence of international vertical specialization all fragments required to produce a given final good must be produced in the same country. International vertical specialization unambiguously reduces the costs of production of all final good producers, albeit not necessarily in the same proportion. If the cost of production of a less efficient producer is reduced to a lesser extent than that of a more efficient producer, vertical specialization may lead to exit in the final good industry. This anti-competitive effect may be strong enough that international vertical specialization leads to a Pareto inferior outcome. On the other hand, we can characterize two sets of policies, which, combined with vertical specialization, are Pareto improving compared to autarky regardless of consumer preferences and of the form of competition in the final good industry.

Suggested Citation

  • Goh, Ai Ting & Olivier, Jacques, 2004. "International Vertical Specializations, Imperfect Competition and Welfare," CEPR Discussion Papers 4311, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4311
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    References listed on IDEAS

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    1. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004. "Trade liberalization and strategic outsourcing," Journal of International Economics, Elsevier, pages 419-436.
    2. Masahisa Fujita & Jacques-François Thisse, 2006. "Globalization And The Evolution Of The Supply Chain: Who Gains And Who Loses?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 811-836, August.
    3. Francois, Patrick & van Ypersele, Tanguy, 2002. "On the protection of cultural goods," Journal of International Economics, Elsevier, pages 359-369.
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    Cited by:

    1. Robert Koopman & Zhi Wang & Shang-Jin Wei, 2008. "How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive," NBER Working Papers 14109, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    anti-competitive effect of trade; fragmentation; imperfect competition; vertical specialization; welfare;

    JEL classification:

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

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