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Market Integration, Choice of Technology, and Welfare

By Jørgen Drud Hansen and Jørgen Ulff-Møller Nielsen

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 tradeoff between marginal costs and fixed costs, but depending on trade costs firms may choose different technologies. Market integration may induce a technological restructuring where firms either diversify their technologies or switch to a homogeneous technology. In general, market integration improves welfare. However, a small decrease of trade costs which induces a switch from heterogeneous technologies to a homogeneous technology may locally reduce global welfare. The model also shows that productivity differences lead to intra-industry firm heterogeneity in size and exports similar to the "new-new" trade models with monopolistic competition. Copyright � 2010 Blackwell Publishing Ltd.

DOI identifier: 10.1111/j.1467-9396.2010.00874.x
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