NATURAL ADVANTAGE EFFECT, LOCATION AND TRADE PATTERNS IN INCREASING RETURNS TO SCALE INDUSTRIES

In a two sectors, two regions economy I show that the higher the increasing returns to scale of an industry, the more easily it will concentrate in response to natural advantage (giving rise to what I call Natural Advantage Effect). To this end, one sector is assumed to be perfectly competitive and the other is monopolistically competitive, with a region's firms producing at a lower marginal cost than the others in the monopolistic sector (or equivalently producing varieties more intensely demanded by consumers). If capital is mobile between regions in the long run, I analytically characterize the process of industrial location of the imperfectly competitive sector in the region with the natural advantage.