Optimal fragmentation in monopolistically competitive industries
Trade in intermediate goods necessitates the viewpoint that final goods are received through a sequential process of production. In this paper, we explore the role of vertical and horizontal complementarities in production and the effects of such complementarities on the level of fragmentation in production. We analyze the optimal level of fragmentation. Using a production chain point of view in a basic monopolistically competitive model allows us to derive analytical results regarding the level of fragmentation, both vertically and horizontally. As the economy grows, our model indicates an increasing level of roundaboutness in production. We also study forces for vertical specialization between countries by extending our framework into a two-country setting.
JEL ClassificationL22 L23 R10 F12
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