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Cost Competition, Fragmentation, and Globalization
Author(s) -
Burda Michael C.,
Dluhosch Barbara
Publication year - 2002
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00341
Subject(s) - fragmentation (computing) , economics , globalization , microeconomics , industrial organization , vertical integration , profit (economics) , market economy , computer science , operating system
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 trade is likely to induce fragmentation when the number of firms is fixed, free entry can either reverse or intensify this result.