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Beyond the Home Market Effect: Market Size and Specialization in a Multi-Country World

Author

Listed:
  • Kristian Behrens

    (Department of Economics, Université du Québec à Montréal (Canada); CORE, Université catholique de Louvain (Belgium); CIRPÉE (Canada); and CEPR (UK).)

  • Andrea R. Lamorgese

    (Research Department, Bank of Italy (Italy))

  • Gianmarco I.P. Ottaviano

    (Bocconi University DEP-KITeS, Milan, Italy - and FEEM, CEPR)

  • Takatoshi Tabuchi

    (Faculty of Economics, University of Tokyo (Japan))

Abstract

The standard two-country model of international trade with monopolistic competition predicts a more-than-proportional relationship between a country’s share of world production of a good and its share of world demand for that same good, a result known as the ‘home market effect’. We first show that this prediction does not generally carry through to the multi-country case, as production patterns are crucially affected by third country effects. We then derive an alternative prediction that holds whatever the number of countries considered. This new prediction takes into account important features of the real world such as comparative advantage due to cross-country technological differences and lack of factor price equalization.

Suggested Citation

  • Kristian Behrens & Andrea R. Lamorgese & Gianmarco I.P. Ottaviano & Takatoshi Tabuchi, 2009. "Beyond the Home Market Effect: Market Size and Specialization in a Multi-Country World," KITeS Working Papers 023, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2009.
    • Handle: RePEc:cri:cespri:kites23_wp
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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