International Vertical Specializations, Imperfect Competition and Welfare

26 Pages Posted: 26 Apr 2004

See all articles by Ai-Ting Goh

Ai-Ting Goh

HEC Paris - Economics & Decision Sciences

Jacques Olivier

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR)

Date Written: March 2004

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

JEL Classification: F12

Suggested Citation

Goh, Ai-Ting and Olivier, Jacques, International Vertical Specializations, Imperfect Competition and Welfare (March 2004). CEPR Discussion Paper No. 4311. Available at SSRN: https://ssrn.com/abstract=533184

Ai-Ting Goh

HEC Paris - Economics & Decision Sciences ( email )

Paris
France
(33 1) 39 67 72 06 (Phone)
(33 1) 39 67 70 85 (Fax)

Jacques Olivier (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7297 (Phone)
+33 1 3967 7085 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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