Asymmetric Transportation Costs and the Home Market Effect

Abstract

Most existing theoretical studies on home market effects depend crucially on assumptions of symmetric transportation costs and increasing returns to scale technology. In our model, we remove the home market effect assumptions from the main model used in the literature. Instead, this paper employs a constant returns monopolistic competition model with asymmetric transportation costs. We show that 1) when the home country's transportation cost is large enough for a given level of the foreign country's transportation cost, the HME appears in the home country, and 2) the opposite of the HME is observed in the home country as long as the foreign country's transportation cost is large enough for a given level of the home country's transportation cost.