Market integration, choice of technology and welfare

This paper develops an international trade model where firms in a duopoly may diversify their technologies for strategic reasons. The firms face the same set of technologies given by a trade-off between marginal costs and fixed costs, but depending on trade costs the firms may choose different technologies. Market integration may induce a technological restructuring where the firms either diversify their technologies or switch to a homogenous technology leaving jumps in welfare both in the home and foreign country. It is shown that with respect to global welfare Cournot Nash equilibria with homogeneous firms are in some cases inferior to Cournot Nash equilibria with heterogeneous firms. A small decrease in trade costs, which induces a switch from heterogeneous technologies to a homogeneous technology, reduces global welfare. Extensive reductions in trade costs allow for the traditional positive global welfare effects of market integration.UnpublishedBernhard, A. B.; J. Eaton; B. Jensen and S. Kortum (2003), Plant and Productivity in International Trade, The American Economic Review, 93:1268-1290. Bernhard, A. B. and J. B. Jensen (2004), Why some Firms Export, Review of Economics and Statistics, 86: 561-569. Collie, D. R. (2006), Tariffs and Subsidies under Asymmetric Oligopoly: Ad Valorem Versus Specific Instruments. The Manchester School, 74(3):314-333. Eckel, C. and J. P. Neary (2006), Multi-product Firms and Flexible Manufacturing in the Global Economy. Paper presented at 2nd Otago Workshop in International trade, 2007. Falvey, R. (1998), Mergers in Open Economies, The World Economy, 21(8): 1061-1076. Greenaway, D. and R. Kneller (2005), Firm Heterogeneity, Exporting and Foreign Direct Investment: Survey. GEP Research Paper Series, 32, 2005, University of Nottingham. Helpman, E.; M. Melitz and S. Yeaple (2004), Export vs. FDI with Heterogeneous Firms, The American Economic Review, 94(1): 300-316. Lahiri, S. and Y. Ono (1997), Asymmetric Oligopoly, International Trade, and Welfare: a Synthesis, Journal of Economics, 65(3):291-310. Melitz, M. J. (2003), The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry productivity. Econometrica, Vol. 71, No. 6.: 1695-1725. Mills, D. E. and W. Smith (1996), It Pays to Be Different: Endogenous Heterogeneity of Firms in an Oligopoly. International Journal of Industrial Organization, 14: 317-329. Montagna, C. (2001), Efficiency Gaps, Love of Variety and International Trade. Economica, 68: 27-44. Schmitt, N. and Z. Yu (2001), Economies of Scale and the Volume of Intra-industry Trade. Economics Letters,74:127-132. Singh, N. and X. Vives (1984), Price and quantity competition in a differentiated duopoly, Rand Journal of Economics, 1584): 546-554