Big vs. small under free trade: Market size and size distribution of firms

In a two-country monopolistic competition general equilibrium model, we consider two types of firms: big with higher fixed cost but lower marginal cost, and small with lower fixed cost but with high marginal cost. We prove that free trade may not always benefit the big-country and/or big firms. The...

Full description

Saved in:
Bibliographic Details
Published in:International review of economics & finance 2014-11, Vol.34, p.175-189
Main Authors: Huang, Yo-Yi, Huang, Deng-Shing
Format: Article
Language:English
Subjects:
Cost advantage
Cost benefit analysis
Economic models
Elasticity
Firm size
Free trade
Globalization
Home-market effect
Monopolistic competition
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:In a two-country monopolistic competition general equilibrium model, we consider two types of firms: big with higher fixed cost but lower marginal cost, and small with lower fixed cost but with high marginal cost. We prove that free trade may not always benefit the big-country and/or big firms. The smaller country may take more than proportional market share after free trade in the big-firm and/or small-firm market, if the cost advantage dominates the disadvantage in the smaller home market. This result may explain the phenomenon of rising big-enterprises from the small emerging economies in the last decades. In addition, we also prove that an increase in the global market size may lead to more small-size firms, unless the elasticity of substitution is large enough.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2014.08.001