Cost Competition, Fragmentation and Globalization

Michael C. Burda & Barbara Dluhosch
This paper proposes a model in which the removal of barriers to trade and factor mobility is associated with endogenous fragmentation of the value-added chain. Fragmentation is the outcome of cost competition – the profit-maximizing choice of cost structure by monopolistically competitive firms. An expansion of the integrated trading area can induce globalization not only in the horizontal dimension associated with love-of-variety preferences, but also vertically as firms vary specialization of production stages. While increased...
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