Testing the Home Market Effect in a Multi-Country World: The Theory

Gianmarco Ottaviano, Andrea Lamorgese, Takatoshi Tabuchi and Kristian Behrens ()

No 4468, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We extend the model by Krugman (1980) to a multi-country set-up and show that the ?home-market effect? highlighted with two countries does not readily extend to such a general setting. In particular, we prove that the most important result, namely the disproportionate causation from demand to supply, generalizes only under the fairly implausible assumption of pairwise symmetric trade costs between all countries. We argue, therefore, that the implications of product differentiation for the structure of world trade are better characterized in terms of spatial (?accessibility?) and non-spatial (?attraction?) effects, and we provide a theory-based specification that suggests how to test the home market effect in such a general setting.

Keywords: Home market effect; Hub effect; Market potential; New trade theory; Economic geography (search for similar items in EconPapers)
JEL-codes: F12 R11 R12 (search for similar items in EconPapers)
Date: 2004-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

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