Abstract
In an ultra-globalized industry, all existing firms service all markets (beyond partitioning and back to Krugman’s world). Moreover, intense competition may force firms with low productivity to compensate for losses at the home market with profits made on foreign markets. This raises the question: are there still gains from further trade liberalization in such a situation? We present a simple and tractable heterogeneous firms specification to address this question. The answer we find is this: yes, even more.
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Notes
See Cole and Davies (2010) for a related but different take on the effects of globalisation on the number of varieties available to customers.
Notice that Cole (2011) shows that iceberg and ad valorem barriers also differ in settings with heterogeneous firms.
The observable productivity of firms is heterogeneous, even though marginal productivity is homogeneous. See Schröder and Sørensen (2011) for a detailed discussion of theoretical and empirical measures of exporter productivity when firms are heterogeneous. In the present framework, firms spread an identical scale across different fixed costs. Thus observable productivity, such as value added over labor usage, is unique to each firm. Obviously, the true underlying driver of firm heterogeneity is ultimately an empirical question, and is likely to change for different industries, countries, and times.
Even though, we have identical marginal productivity (β), firms’ actual productivity (the inverse of average costs) is unique to each firm, depending on the different \( a_{i} \)’s. This can easily be verified by calculating firm total output over firm labor usage in the model.
Note that the distribution of active firms only runs from 0 to \( a_{{prod}} . \)
Note that the distribution of active firms only runs from 0 to \( a_{{ex}}^{b}. \)
See for example Jørgensen and Schröder (2008) for a similar approach.
Notice that even in an ultra-globalized scenario of zero-partitioning, where all firms serve both domestic and foreign markets, the number of domestic firms (m b) is greater than that in the case of partitioning (m p). Moreover, the number of varieties competing, including both domestic and foreign varieties, in the case of partitioning is the largest in both countries (v b > v p > v a). Therefore, the issue of possible endogenous markups due to firm’s market power (e.g., Melitz and Ottaviano 2008) will not arise.
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Acknowledgments
We wish to thank David Collie for helpful comments and clarifying discussions. Furthermore we benifited from the comments form participants at EARIE 2009. Jan G. Jørgensen gratefully acknowledges financial support from the Danish Social Sciences Research Council (grant no. 275-06-0025). Philipp J. H. Schröder gratefully acknowledges financial support from the Tuborgfoundation. Zhihao Yu gratefully acknowledges financial support from the Social Sciences and Humanities Research Council of Canada.
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Jørgensen, J.G., Schröder, P.J.H. & Yu, Z. Globalization beyond partitioning: back to Krugman’s world. Rev World Econ 148, 73–87 (2012). https://doi.org/10.1007/s10290-011-0111-0
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DOI: https://doi.org/10.1007/s10290-011-0111-0