Working Paper: CEPR ID: DP4311
Authors: Ai Ting Goh; Jacques Olivier
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: anticompetitive effect of trade; fragmentation; imperfect competition; vertical specialization; welfare
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| production taxes and lump-sum transfers (H29) | welfare gain (D69) |
| International vertical specialization (F12) | production costs (D24) |
| International vertical specialization (F12) | exit of less efficient firms (L19) |
| exit of less efficient firms (L19) | Pareto inferior outcome (D69) |
| vertical specialization (L23) | negative welfare outcomes (I30) |