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Home market effects and increasing returns with non-constant marginal costs

Author

Listed:
  • Nahyeon Bak
  • Daisoon Kim
  • Mishita Mehra

Abstract

We reexamine the role of increasing returns in production, central to trade and economic geography theories, focusing on the home market effect. We extend the conventional multi-industry new trade model to introduce (1) nonconstant marginal costs and (2) nonhomothetic production in factors. If factors that are more (less) intensively used in fixed costs than variable costs also have higher relative prices in large countries compared to small countries, then large countries exhibit larger (smaller) firm sizes and specialize in industries with decreasing (increasing) marginal costs. Notably, different levels of fixed costs have a limited impact on these patterns.

Suggested Citation

  • Nahyeon Bak & Daisoon Kim & Mishita Mehra, 2024. "Home market effects and increasing returns with non-constant marginal costs," Journal of Economic Geography, Oxford University Press, vol. 24(6), pages 871-885.
    • Handle: RePEc:oup:jecgeo:v:24:y:2024:i:6:p:871-885.
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    File URL: http://hdl.handle.net/10.1093/jeg/lbae030
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    More about this item

    Keywords

    home market effect; economies of scale; non-constant marginal costs; non-homothetic production; factor endowment;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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