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Title: International Vertical Specializations, Imperfect Competition and Welfare

Author(s): Ai Ting Goh and Jacques Olivier

Publication Date: March 2004

Keyword(s): anti-competitive effect of trade, fragmentation, imperfect competition, vertical specialization and welfare

Programme Area(s): International Trade and Regional Economics

Abstract: This Paper looks at the impact of international vertical specialization when the final good industry is imperfectly competitive. Final goods are assembled out of different fragments. In the absence of international vertical specialization all fragments required to produce a given final good must be produced in the same country. International vertical specialization unambiguously reduces the costs of production of all final good producers, albeit not necessarily in the same proportion. If the cost of production of a less efficient producer is reduced to a lesser extent than that of a more efficient producer, vertical specialization may lead to exit in the final good industry. This anti-competitive effect may be strong enough that international vertical specialization leads to a Pareto inferior outcome. On the other hand, we can characterize two sets of policies, which, combined with vertical specialization, are Pareto improving compared to autarky regardless of consumer preferences and of the form of competition in the final good industry.

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Bibliographic Reference

Goh, A and Olivier, J. 2004. 'International Vertical Specializations, Imperfect Competition and Welfare'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4311