Sunk Costs, Market Access, Economic Integration, and Welfare

The nature of the equilibrium that arises after economic integration is shown to depend crucially on how initial entry costs are divided along two separate dimensions: market access versus technology costs, and fixed versus sunk costs. There are three post-integration equilibrium regimes: a traditional trade theory regime which arises when both market access costs and fixed costs are small, a new trade theory regime which arises when market access costs are small but fixed costs are high, and a market access regime which arises when market access costs are high. While the first two regimes have already appeared in the literature, the third is new. The sign, magnitude, and qualitative behavior of the welfare effects of integration across all three regimes depend on the configuration of these costs.