Les Cahiers de Recherche - HEC Paris
International Vertical Specialization, Imperfect Competition and Welfare
() and Ai ting GOH
Abstract: This paper looks at the impact of international vertical
specialization when the final good industry is imperfectly competitive.
Final goods are assembled out of different fragments. In the absence of
international vertical specialization all fragments required to produce a
given final good must be produced in the same country. International
vertical specialization unambiguously reduces the costs of production of
all final good producers, albeit not necessarily in the same proportion. If
the cost of production of a less efficient producer is reduced to a lesser
extent than that of a more efficient producer, vertical specialization may
lead to exit in the final good industry. This anti-competitive effect may
be strong enough that international vertical specialization leads to a
Pareto inferior outcome. On the other hand, we can characterize two sets of
policies, which, combined with vertical specialization, are Pareto
improving compared to autarky regardless of consumer preferences and of the
form of competition in the final good industry.
Keywords: fragmentation; vertical specialization; imperfect competition; welfare; anti-competitive effect of trade; (follow links to similar papers)
JEL-Codes: F12; (follow links to similar papers)
21 pages, December 1, 2003
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