Consumer-benefiting transport cost: The role of product innovation in a vertical structure
Kazuhiro Takauchi and
Tomomichi Mizuno ()
No 2017, Discussion Papers from Graduate School of Economics, Kobe University
We study the effects of a reduction of transport cost on the firm's activity of product innovation and on consumer welfare. Firms engage in product R&D that increases the degree of product differentiation, purchase intermediate inputs from an exclusive supplier, and export their products to the foreign market paying a per-unit transport cost. Trade theory commonly asserts that zero transport cost maximizes consumer surplus. Contrary to this standard belief, we show that a positive transport cost can maximize consumer surplus. We also consider more general effects of R&D and show that our main results hold even in such case.
Pages: 28 pages
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Working Paper: Consumer-benefiting transport cost: The role of product innovation in a vertical structure (2019)
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