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Increasing Returns, Input-Output Linkages and Technological Leapfrogging

Abstract Firms agglomerate in one region due to increasing returns, input-output linkages and transportation costs. In the de-industrialised region factor prices are lower and a new technology may be profitable to adopt in that region instead, inducing a change in the technological leadership. This paper shows that the risk of locking in to an old technology is monotonically increasing in the benefits of agglomeration. Greater incompatibility between technologies also increases the risk of rejecting potentially superior manufacturing processes.

Earlier (and somewhat embarrassing) drafts of this paper have been presented at:

• The Second Annual Conference of the European Trade Study Group (Glasgow, 2000)
• The Swedish Network for European Studies in Economics and Business (Mölle, 2001)
• Nordic International Trade Seminars (Copenhagen, 2001)
• The European Economic Association's 16th Annual Congress (Lausanne, 2001)

Cournot Competition, Market Size Effects, and Agglomeration

Abstract We analyse a two stage location-quantity game with (initially) two firms and two regions. We show that the firms will never agglomerate in the same location if transportation is costly between the regions. This result is generalised to many firms. We also analyse the effects of differences in market size and economic integration on the allocation of industrial activity. For high levels of trade costs firms locate in different regions. Lowering the trade costs beyond a critical level triggers an agglomeration of industry in the larger region. This process of agglomeration is gradual in nature and trade costs have to be successively lowered for a full-scale agglomeration to take place.

Earlier drafts have been presented at:

• The third annual congress of the ETSG (Brussels, 2001)
• NOITS (Stockholm, 2002)

Resisting Economic Integration when Industry Location is Uncertain

Abstract: This paper analyses the political determination of transportation costs in a new economic geography model. In a benchmark case with certainty about where agglomeration takes place, a majority of voters favour economic integration and the resulting equilibrium is an industrialised core and a de-industrialised periphery. Allowing for uncertainty, a high level of trade costs may win the election and maintain the initial distribution of industry. The reason is that a coalition of risk-averse immobile factors of production votes for the status quo due to uncertainty about which region will attract industry if economic integration is pursued. Finally, the standard view that agglomeration is unambiguously beneficial to residents in the industrial centre is challenged by introducing costs of undertaking economic integration.

Presented at:

• NOITS (Copenhagen, 2004)

Shackling the footloose firm? Factor interests and majority voting

Abstract Adding majority voting to a simple new economic geography model, we analyse under which circumstances politically determined barriers to international firm relocation exist. Two countries, differing in market size, consider abolishing restrictions on firm mobility. Eliminating these restrictions will fully or partially de-industrialize the small country as firms relocate to the larger market. We show that there is unanimous support for (resistance against) the removal of obstacles to firm relocation in the large (small) country if the country size difference is small, while a large difference in size gives rise to domestic conflicts of interest and international cross-factor alignments of interests. Furthermore, trade liberalisation may have facilitated the removal of barriers to firm relocation in large countries. Finally, political integration between trading countries is likely to contribute to the removal of barriers to firm relocation, and support for (resistance against) such a development comes primarily from the immobile factor in the large (small) country.

Presented at:

• The Spring 2006 Midwest International Economics Meeting (East Lansing, Michigan, 2006)
• The European Economic Association's 21st Annual Congress (Vienna, 2006)
• The Fudan-Lund Economic Forum (Shanghai, 2006)
• The First World Meeting of the Public Choice Society (Amsterdam, 2007)

To Segment or Not to Segment Markets? A Note on the Profitability of Market Segmentation for an International Oligopoly

Abstract Recent research on endogenous market segmentation finds that a monopoly’s expected profit under perfectly segmented markets increases (relative to its profits under perfectly integrated markets) with exchange rate volatility. The firm thus has an incentive to make consumer resale increasingly difficult. We show that such an incentive may be absent for two firms competing in a Cournot fashion. While limitless consumer arbitrage forces a monopolist to deviate from its optimal pricing policies, it acts as a “disciplining device” helping the Cournot duopoly to approach and commit to the cartel solution in some markets. The firms’ total profit may hence be higher when they engage in integrated-market pricing and neither firm would have an incentive to take on additional costs to facilitate segmenting.