Testing the Home Market Effect in a Multi-Country World: The Theory
38 Pages Posted: 5 Aug 2004
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
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Empirics of Agglomeration and Trade
By Keith Head and Thierry Mayer
-
Market Access, Economic Geography, and Comparative Advantage: an Empirical Assessment
-
Economic Geography and Regional Production Structure: An Empirical Investigation
-
Economic Geography and Reginal Production Structure: An Empirical Investigation
-
The Home Market Effect and Bilateral Trade Patterns
By Gordon H. Hanson and Chong Xiang
-
On the Pervasiveness of Home Market Effects
By Keith Head, Thierry Mayer, ...