Market Integration, Choice of Technology, and Welfare

Jørgen Drud Hansen and Jørgen Ulff‐Møller Nielsen

Review of International Economics, 2010, vol. 18, issue 2, 229-242

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.

Date: 2010
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