Firm Heterogeneity, Home Market Effect, and Gravity Equation in an Oligopoly

Kenji Fujiwara ()
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Kenji Fujiwara: Kwansei Gakuin University

Open Economies Review, 2024, vol. 35, issue 5, No 8, 1115-1131

Abstract: Abstract Developing a two-country oligopoly model with firm heterogeneity, this paper examines the relationship among market size, the Home Market Effect, and the gravity equation. We show that in the long-run with free entry, the Home Market Effect holds, namely, more firms locate in the large-sized country. This leads the large-sized country to be a net exporter of the oligopoly good. In the short-run with restricted entry, the Home Market Effect no longer holds and the large-sized country becomes a net importer of the oligopoly good. These results suggest that the theoretical predictions of Feenstra et al. (Can J Econ 34(2):430–447, 2001) survive firm heterogeneity.

Keywords: Oligopoly; Firm heterogeneity; Home market effect; Gravity equation (search for similar items in EconPapers)
JEL-codes: F10 F12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11079-024-09760-x

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