Fragmentation and Welfare in Monopolistic Competition |
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| Authors: | Morihiro Yomogida |
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| Affiliation: | 1. Sophia University, Japan;2. This paper is based on a chapter of my PhD dissertation submitted to the University of Rochester ( Yomogida, 2003). I would like to thank my adviser, Ronald Jones, for his valuable comments. I would also like to thank anonymous referees, Fumio Dei, Taiji Furusawa, Toru Hokari, Makoto Ikema, Jota Ishikawa, Michihiro Ohyama, Masatoshi Tsumagari, and Makoto Yano for their helpful suggestions. |
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| Abstract: | We examine the welfare effect of fragmentation with a general‐equilibrium model of monopolistic competition. Using the efficiency property of monopolistic competition models, we develop a diagram that is used to show that fragmentation of production arises, i.e. firms in a country specialize in developing blueprints and out‐source the manufacturing of their products to the other country. Such fragmentation allows countries to benefit from trade due to two different sources: comparative advantage and product diversity. We show how these two sources result in gains from trade induced by this production fragmentation. |
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