Fragmentation and Welfare in Monopolistic Competition

Morihiro Yomogida

Review of International Economics, 2010, vol. 18, issue 3, 531-539

Abstract: We examine the welfare effect of fragmentation with a general‐equilibrium model of monopolistic competition. Using the efficiency property of monopolistic competition models, we develop a diagram that is used to show that fragmentation of production arises, i.e. firms in a country specialize in developing blueprints and out‐source the manufacturing of their products to the other country. Such fragmentation allows countries to benefit from trade due to two different sources: comparative advantage and product diversity. We show how these two sources result in gains from trade induced by this production fragmentation.

Date: 2010
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https://doi.org/10.1111/j.1467-9396.2010.00885.x

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