Beyond the Home Market Effect: Market Size and Specialization in a Multi-Country World

24 Pages Posted: 8 Jan 2010

See all articles by Kristian Behrens

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics

Andrea Roberto Lamorgese

Bank of Italy

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Takatoshi Tabuchi

University of Tokyo - Faculty of Economics

Date Written: January 7, 2010

Abstract

The standard two-country model of international trade with monopolistic competition predicts a more-than-proportional relationship between a country’s share of world production of a good and its share of world demand for that same good, a result known as the “home market effect”. We first show that this prediction does not generally carry through to the multi-country case, as production patterns are crucially affected by third country effects. We then derive an alternative prediction that holds whatever the number of countries considered. This new prediction takes into account important features of the real world such as comparative advantage due to cross-country technological differences and lack of factor price equalization.

Keywords: Comparative Advantage, Home Market Effect, Hub Effect, International Trade, Monopolistic Competition, Multi-country Models

JEL Classification: F12, R12

Suggested Citation

Behrens, Kristian and Lamorgese, Andrea Roberto and Ottaviano, Gianmarco I.P. and Tabuchi, Takatoshi, Beyond the Home Market Effect: Market Size and Specialization in a Multi-Country World (January 7, 2010). FEEM Working Paper No. 119.2009, Available at SSRN: https://ssrn.com/abstract=1532747 or http://dx.doi.org/10.2139/ssrn.1532747

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Andrea Roberto Lamorgese

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 3441 (Phone)
+39 06 4792 2601 (Fax)

Gianmarco I.P. Ottaviano (Contact Author)

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

Takatoshi Tabuchi

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan
+81 3 5841 5603 (Phone)
+81 3 5841 5521 (Fax)

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