The multi-market firm, transportation costs, and the separation of the output and allocation decisions

Despite the documented importance of transport costs for firmswith sales in geographically separated markets, theoreticalanalyses typically ignore such costs. This paper analyzes theeffects of transport costs for a risk averse, competitive firmselling a single good in a domestic (certain) and a foreign(uncertain) market, and shows that these effects are asymmetric.The effects on total output and the inter-market allocationof output depend on the behavior of marginal domestic transportcosts, but are largely independent of the form of the foreigntransport cost function. Moreover, regardless of the latter,if marginal transport costs in the domestic market are constant,the firm's total output is independent of its attitude towardsrisk and the parameters of the risky market. This suggests thatthe firm's activity can be insulated from foreign uncertaintiesby government policies that focus on the shape of the domestictransportation cost function.