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International Trade, Migration And Investment With Horizontal Product Differentiation And Free Entry And Exit Of Firms

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  • Hernán Vallejo G

Abstract

This paper builds on a circular road model of the world with horizontal product differentiation and free entry and exit of firms, to derive results that can be applied in industrial organization, international trade and political economy. The model shows that freer international trade increases welfare -with ideal variety preferences through the exploitation of economies of scale and better allocative efficiency; that all participating countries gain from trade, and that smaller countries have more to win from free trade than larger countries. The model also explains that there may be adjustment costs when liberalizing trade and thus, political resistance to trade liberalization. International migration can also be analyzed with the model, showing the possibility of suboptimal migration flows and political barriers to the exit of national citizens. The model suggests that foreign direct investment will be welfare improving for the source country in the short run, and for the receiving country in the long run. Finally, the model provides a micro foundation for the use of demand curves with constant and negative slopes.

Suggested Citation

  • Hernán Vallejo G, 2005. "International Trade, Migration And Investment With Horizontal Product Differentiation And Free Entry And Exit Of Firms," Documentos CEDE 2917, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:002917
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    File URL: https://repositorio.uniandes.edu.co/bitstream/handle/1992/7971/dcede2005-62.pdf
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    1. B. Curtis Eaton & Richard G. Lipsey, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(1), pages 27-49.
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    3. Boccard, N. & Wauthy, Xavier, 1997. "Export Restraints and Horizontal Product Differentiation," LIDAM Discussion Papers IRES 1997024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Sep 1997.
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    5. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    6. Nicolas Schmitt, 1990. "Two-Country Trade Liberalization in an Address Model of Product Differentiation," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 654-675, August.
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    More about this item

    Keywords

    Monopolistic competition; horizontal product differentiation international trade; international migration and foreign direct investment;
    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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