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Big vs. small under free trade: Market size and size distribution of firms

Yo-Yi Huang and Deng-Shing Huang

International Review of Economics & Finance, 2014, vol. 34, issue C, 175-189

Abstract: In a two-country monopolistic competition general equilibrium model, we consider two types of firms: big with higher fixed cost but lower marginal cost, and small with lower fixed cost but with high marginal cost. We prove that free trade may not always benefit the big-country and/or big firms. The smaller country may take more than proportional market share after free trade in the big-firm and/or small-firm market, if the cost advantage dominates the disadvantage in the smaller home market. This result may explain the phenomenon of rising big-enterprises from the small emerging economies in the last decades. In addition, we also prove that an increase in the global market size may lead to more small-size firms, unless the elasticity of substitution is large enough.

Keywords: Globalization; Home-market effect; Firm size; Cost advantage (search for similar items in EconPapers)
JEL-codes: F12 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.iref.2014.08.001

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