DP3454 On the Pervasiveness of Home Market Effects

Author(s):	Keith Head, Thierry Mayer, John Ries
Publication Date:	July 2002
Keyword(s):	home market effect, increasing returns, spatial competition
JEL(s):	F12, R3
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=3454

Krugman?s (1980) model of trade predicts that the country with the relatively large number of consumers is the net exporter and hosts a disproportionate share of firms in the increasing returns sector. He terms these results 'home market effects'. This Paper analyzes three additional models featuring increasing returns, firm mobility, and trade costs to assess the robustness of home market effects to alternative modeling assumptions. We find strikingly similar results for two of the models that relax assumptions about the nature of demand, competition, and trade costs. A model that links varieties to nations rather than firms can, however, generate opposite results.