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On the Pervasiveness of Home Market Effects

  • Keith Head

    (University of British Columbia)

  • Thierry Mayer

    (University of Paris I)

  • John Ries

    (University of British Columbia)

Krugman's model of trade between two countries of unequal size predicts that the country with the relatively large number of consumers is the net exporter and host of a disproportionate share of firms in the differentiated good sector. He terms these results home market effects. This paper analyzes two models that offer alternatives to Krugman's assumptions of Dixit-Stiglitz monopolistic competition with iceberg transport costs. Using a framework of location choice, we generate strikingly similar results for the three models. The common ingredients of these imperfect competition models are trade costs and increasing returns to scale.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0862.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0862
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  1. James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers 380, Queen's University, Department of Economics.
  2. Robert C. Feenstra & James A. Markusen & Andrew K. Rose, 1998. "Undertstanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," NBER Working Papers 6804, National Bureau of Economic Research, Inc.
  3. Donald R. Davis, 1997. "The home market, trade, and industrial structure," Staff Reports 35, Federal Reserve Bank of New York.
  4. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  6. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
  7. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
  9. Ottaviano, G.I.P. & Thisse, J.-F., 1999. "Monopolistic Competition, Multiproduct Firms and Optimum Product Diversity," Economics Working Papers eco99/31, European University Institute.
  10. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography and Comparative Advantage: An Empirical Assessment," Harvard Institute of Economic Research Working Papers 1850, Harvard - Institute of Economic Research.
  11. Donald R. Davis & David E. Weinstein, 1997. "Economic Geography and Regional Production Structure: An Empirical Investigation," Harvard Institute of Economic Research Working Papers 1802, Harvard - Institute of Economic Research.
  12. Markusen, James R. & Venables, Anthony J, 1986. "Trade Policy with Increasing Returns and Imperfect Competition: Contradictory Results from Competing Assumptions," CEPR Discussion Papers 120, C.E.P.R. Discussion Papers.
  13. Elhanan Helpman & Paul Krugman, 1987. "Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258087x, June.
  14. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
  15. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
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