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International Vertical Specialization, Imperfect Competition and Welfare

  • OLIVIER, Jacques


  • GOH, Ai ting


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    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.

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    Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 791.

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    Length: 21 pages
    Date of creation: 01 Dec 2003
    Date of revision:
    Handle: RePEc:ebg:heccah:0791
    Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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    1. 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, 08.
    2. Francois, Patrick & van Ypersele, Tanguy, 2002. "On the protection of cultural goods," Journal of International Economics, Elsevier, vol. 56(2), pages 359-369, March.
    3. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2001. "Trade Liberalization and Strategic Outsourcing," Discussion Papers 2001-04, Graduate School of Economics, Hitotsubashi University.
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