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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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    1. Spyros Vassilaikis, 1989. "Increasing Returns and Strategic Behavior: The Worker-Firm Ratio," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 622-636, Winter.
    2. Henderson, J. Vernon, 1986. "Efficiency of resource usage and city size," Journal of Urban Economics, Elsevier, vol. 19(1), pages 47-70, January.
    3. Locay, Luis, 1990. "Economic Development and the Division of Production between Households and Markets," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 965-982, October.
    4. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 889-927, October.
    5. Adam B. Jaffe & Manuel Trajtenberg & Rebecca Henderson, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 577-598.
    6. repec:hoo:wpaper:e-93-6 is not listed on IDEAS
    7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    8. Goodfriend, Marvin & McDermott, John, 1995. "Early Development," American Economic Review, American Economic Association, vol. 85(1), pages 116-133, March.
    9. M. A. Adelman, 1955. "Concept and Statistical Measurement of Vertical Integration," NBER Chapters,in: Business Concentration and Price Policy, pages 281-330 National Bureau of Economic Research, Inc.
    10. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185-185.
    11. George J. Stigler, Chairman, Universities-National Bureau Committee for Economic Research, 1955. "Business Concentration and Price Policy," NBER Books, National Bureau of Economic Research, Inc, number univ55-1, December.
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    Keywords

    Industrial location;

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