How Do Cost (or Demand) Asymmetries and Competitive Pressure.pdf

How Do Cost (or Demand) Asymmetries and Competitive Pressure Shape Trade Patterns and Location? ∗ Gaetano Alfredo Minerva † Dipartimento di Scienze Economiche, Universit`a di Pisa, Via Ridolfi 10, I - 56124 Pisa This version: August 2004 Abstract A two sectors, two regions economy, where one sector is perfectly competitive and the other is monopolistically competitive, is considered. The region hosting more firms in the monopolistic sector produces at a lower marginal cost (or equivalently produces varieties more intensely demanded by consumers). We show how different trade patterns arise in this sector as a function, among the others, of overall compet- itive pressure. If capital is mobile between regions in the long run, we characterize when full agglomeration in the more productive region is the equilibrium. Finally, some numerical examples show how structural changes in trade patterns originate from changes in the parameters of the model. Keywords : Industrial location; monopolistic competition; intraindustry trade; cost advantage; demand intensity. JEL Classification: D43; F12; F21; L13. ∗The present work, still in a preliminary and incomplete version, is circulated for discussion purposes. I would like to thank for valuable suggestions on earlier drafts Fabio Montobbio, Gianmarco Ottaviano, Paolo Scapparone and participants to the I doctoral students Seminar held by Societ`a Italiana di Economia e Politica Industriale at the University of Ferrara. † e-mail: ga.minerva@ec.unipi.it 1 1 Introduction Much of the debate ab