The evolution of the supply chain in a three-region framework and its implications on welfare under economic integration

Abstract This paper discusses the evolution of the supply chain and welfare under economic integration in a three-region framework. Economic integration is measured by the reduction of inter-regional trade costs and by the reduction of communication costs between headquarters and plants. Numerical simulations show that freer trade leads to the agglomeration of plants to the core region and, depending on the level of communication costs, to some industry accumulation to the most developed region of the periphery. Welfare increases in all regions. As for the reduction of communication costs, it seems that the most developed region of the periphery can become the core region. Regarding welfare, unlike the reduction of trade costs, the reduction of communication costs is beneficial only to the region gaining industry. Also, the best welfare enhancing policy is to promote free trade together with the development and diffusion of new information and communication technologies that favour the reduction of communication costs. JEL classification: F15, R1