Market Integration, Choice of Technology and Welfare

J¿rgen Drud Hansen and J¿rgen Ulff-M¿ller Nielsen ()
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J¿rgen Drud Hansen: Department of Economics, Aarhus School of Business
J¿rgen Ulff-M¿ller Nielsen: Department of Economics, Aarhus School of Business

No 711, Working Papers from University of Otago, Department of Economics

Abstract: This paper develops an international trade model where firms in a duopoly may diversify their technologies for strategic reasons. The firms face the same set of technologies given by a trade-off between marginal costs and fixed costs, but depending on trade costs the firms may choose different technologies. Market integration may induce a technological restructuring where the firms either diversify their technologies or switch to a homogenous technology leaving jumps in welfare both in the home and foreign country. It is shown that with respect to global welfare Cournot Nash equilibria with homogeneous firms are in some cases inferior to Cournot Nash equilibria with heterogeneous firms. A small decrease in trade costs, which induces a switch from heterogeneous technologies to a homogeneous technology, reduces global welfare. Extensive reductions in trade costs allow for the traditional positive global welfare effects of market integration.

Keywords: Firm heterogeneity; duopoly, technology choice; market integration; welfare (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007-04, Revised 2007-04
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