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Fragmentation and Welfare in Monopolistic Competition
Author(s) -
Yomogida Morihiro
Publication year - 2010
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/j.1467-9396.2010.00885.x
Subject(s) - monopolistic competition , fragmentation (computing) , economics , welfare , microeconomics , industrial organization , international economics , monopoly , market economy , computer science , operating system
We examine the welfare effect of fragmentation with a general‐equilibrium model of monopolistic competition. Using the efficiency property of monopolistic competition models, we develop a diagram that is used to show that fragmentation of production arises, i.e. firms in a country specialize in developing blueprints and out‐source the manufacturing of their products to the other country. Such fragmentation allows countries to benefit from trade due to two different sources: comparative advantage and product diversity. We show how these two sources result in gains from trade induced by this production fragmentation.