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Localization of industry and vertical disintegration

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  • Thomas J. Holmes

Abstract

We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.

Suggested Citation

  • Thomas J. Holmes, 1995. "Localization of industry and vertical disintegration," Staff Report 190, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:190
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Keywords

    Industrial location;

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