Testing the Home Market Effect in a Multi-Country World: The Theory

Behrens, Kristian; Ottaviano, Gianmarco I.P.; Lamorgese, Andrea Roberto; Tabuchi, Takatoshi

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Testing the Home Market Effect in a Multi-Country World: The Theory

38 Pages Posted: 5 Aug 2004

See all articles by Kristian Behrens

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Takatoshi Tabuchi

University of Tokyo - Faculty of Economics

Date Written: July 2004

Abstract

We extend the model by Krugman (1980) to a multi-country set-up and show that the 'home-market effect' highlighted with two countries does not readily extend to such a general setting. In particular, we prove that the most important result, namely the disproportionate causation from demand to supply, generalizes only under the fairly implausible assumption of pairwise symmetric trade costs between all countries. We argue, therefore, that the implications of product differentiation for the structure of world trade are better characterized in terms of spatial ('accessibility') and non-spatial ('attraction') effects, and we provide a theory-based specification that suggests how to test the home market effect in such a general setting.

Keywords: Home market effect, hub effect, market potential, new trade theory, economic geography

JEL Classification: F12, R11, R12

Suggested Citation: Suggested Citation

Behrens, Kristian and Ottaviano, Gianmarco I.P. and Lamorgese, Andrea Roberto and Tabuchi, Takatoshi, Testing the Home Market Effect in a Multi-Country World: The Theory (July 2004). Available at SSRN: https://ssrn.com/abstract=572853