Working Paper: CEPR ID: DP2938
Authors: Joe Tharakan; Jacques-François Thisse
Abstract: Market size and transport costs are important ingredients of international trade. We propose to look at these issues from a different perspective. Using a Hotelling duopoly model with quadratic transport costs, we analyse the welfare effects of international trade between two countries that differ only in size. Our results indicate that in most cases free trade will lead to a decrease in prices. Furthermore, the firm of the small country will benefit from market expansion. Finally, the model predicts that the small country benefits from a move towards free trade whereas the opening to trade may hurt the large country.
Keywords: Geographical Nation Size; International Trade; Mill Pricing; Spatial Competition
JEL Codes: F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Free Trade (F19) | Decrease in Prices (E31) |
| Free Trade (F19) | Welfare Gains for Small Country (D69) |
| Free Trade (F19) | Welfare Losses for Large Country (D69) |
| Free Trade (F19) | Increase in Small Country's Market Share (F69) |
| Increase in Small Country's Market Share (F69) | Decrease in Large Country's Market Share (F69) |
| Geographical Size (R12) | Asymmetry in Trade Effects (F12) |