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Market Integration, Choice of Technology and Welfare

Author

Listed:
  • J¿rgen Drud Hansen

    (Department of Economics, Aarhus School of Business)

  • J¿rgen Ulff-M¿ller Nielsen

    (Department of Economics, Aarhus School of Business)

Abstract

This paper develops an international trade model where firms in a duopoly may diversify their technologies for strategic reasons. The firms face the same set of technologies given by a trade-off between marginal costs and fixed costs, but depending on trade costs the firms may choose different technologies. Market integration may induce a technological restructuring where the firms either diversify their technologies or switch to a homogenous technology leaving jumps in welfare both in the home and foreign country. It is shown that with respect to global welfare Cournot Nash equilibria with homogeneous firms are in some cases inferior to Cournot Nash equilibria with heterogeneous firms. A small decrease in trade costs, which induces a switch from heterogeneous technologies to a homogeneous technology, reduces global welfare. Extensive reductions in trade costs allow for the traditional positive global welfare effects of market integration.

Suggested Citation

  • J¿rgen Drud Hansen & J¿rgen Ulff-M¿ller Nielsen, 2007. "Market Integration, Choice of Technology and Welfare," Working Papers 0711, University of Otago, Department of Economics, revised Apr 2007.
    • Handle: RePEc:otg:wpaper:0711
    as

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    File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_0711.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Firm heterogeneity; duopoly; technology choice; market integration; welfare;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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