Home Market Effects in the Chamberlinian–ricardian World

Abstract

According to conventional home market effects, free trade tends to shrink the market share for a smaller economy in differentiated manufacturing goods, and in the extreme, leads to a complete hollowing out of the industry. Departing from the original Helpman–Krugman modelling assumptions behind the home market effects, we introduce a technology advantage in terms of the difference in fixed cost and/or marginal cost between trading partners and prove that home market effects will be offset and even reverse if a small economy has better technology than another country. With a higher elasticity of substitution, the marginal cost advantage becomes more important if it is to dominate the home market effect. We also show that even with an identical country size, the intra‐industry trade addressed in the existing literature may not occur; it will occur only if the technology differential lies within a certain range that is positively affected by the level of transport cost.

Endogenous Sunk-Costs Technology and Home Market Effects

“…8, No. 3;2016 120 In order to simplify the model, assume that the homogenous sector remains active in Home and Foreign under free trade, e.g., Feenstra (2003), Davis (1998), Ricci (1999), and Huang et al (2014). The identical technology and costless trade in homogenous goods ensure an identical wage rate between Home and Foreign.…”

“…The existing literature on home market effects specifies the linear labor requirements with exogenous fixed labor requirements and constant marginal labor requirements, for example, Ricci (1999), Forslid and Wooton (2003) and Huang et al (2014). Ricci (1999) and Forslid and Wooton (2003) assume that the marginal costs and the fixed costs of production vary across the monopolistically sectors respectively and then confirm the home market effects.…”

“…Ricci (1999) and Forslid and Wooton (2003) assume that the marginal costs and the fixed costs of production vary across the monopolistically sectors respectively and then confirm the home market effects. Conversely, Huang et al (2014) assume both the marginal costs and the fixed costs of production are different across the monopolistically sectors. Huang et al find that the relative technology difference may lead to a reversal home market effects.…”

On the new economic geography of a multicone world

“… Huang, Lee, and Huang () assume that both fixed and marginal costs may differ across countries, but not across varieties. These authors show that the home market effect could be overcome by CA when the small country has a technological edge.…”