How Do Cost (or Demand) Asymmetries and Competitive Pressure Shape Trade Patterns and Location

Abstract

A two sectors, two regions economy, where one sector is perfectly competitive and the other is monopolistically competitive, is considered. The region hosting more firms in the monopolistic sector produces at alower marginal cost (or equivalently produces varieties more intensely demanded by consumers). We show how different trade patterns arise in this sector as a function, among the others, of overall competitive pressure. If capital is mobile between regions in the long run, we characterize when full agglomeration in the more productive region is the equilibrium. Finally, some numerical examples show how structural changes in trade patterns originate from changes in the parameters of the model.