Firm Location, Trade and Economic Integration

Joaquin Andaluz and Agustín Gil ()
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Agustín Gil: University of Zaragoza, Postal: Departamento de Análisis Económico. Facultad, de Ciencias Económicas y Empresariales. Gran Vía 2. 50005 Zaragoza, Spain

Journal of Economic Integration, 2002, vol. 17, 671-686

Abstract:

The aim of this paper is to analyse how a process of economic integration between two adjacent countries with different transport costs (different levels of development) affects firms’ decisions on location and prices. Considering the situation where one firm is located in each country and manufactures a product that is imported by the more developed country, we find that when there are barriers to trade one of the firms tends to locate on the common frontier and the other at the far extreme. By contrast, with full economic integration, both firms tend to maximise differentiation, locating themselves at the non-neighbouring extremes, which leads to higher prices and profits. Therefore, the firm located in the more developed country increases its market share.

Keywords: Market Integration; Price-Location Competition; Transport Costs (search for similar items in EconPapers)
JEL-codes: F15 L13 R32 (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0214

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