Core-Periphery model: does perfect competition matters?

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1 Core-Periphery model: does perfect competition matters? Sergey Kichko, and Evgeny Zhelobodko National Research University Higher School of Economics St. P., July 2013

2 Main questions of classical model There are dispersion and aglomeration forces. Which of them is dominate? Depending on which parameters it happens?

3 Tomahawk

4 Research agenda Classical model: under big enough trade cost dispersion equilibrium is stable due to immobile demand (immobile workers of the second sector). What is the role of the perfect competiton (think about Starett theorem)?

5 The model

6 Assumptions We study classical Core-Periphery model. The only dierence: both sectors produce under IRS and monopolistic competition.

7 Long-run equilibria Mobile worker take in account countries' real wages to choose her location. where: Real wage is a nominal wage divided by price's indices of both sectors: ( w λ H 1 w F 1 = λ(1 λ) ( ) µ ( ) 1 µ ( ) µ ( ) 1 µ ), P H 1 P H 2 P F 1 P F 2 λ is an endogeneous share of moblie workers; w j 1 is a wage in sector 1 in country j; P j i is a price index in sector i in country j

8 Long-run equilibria We show that: = P F 2 Second sector price indices are equal (P F 1 ) and do not depend on wages in both sectors as well as trade cost. The equilibrium relative real wage w = w H 1 /w F 1 Krugman model. is the same as in Price indices in rst sector are the same as in Krugman model due to separating markets in the sence that: two sectoral sub-problems can be considered. wages, and therefore total expenditure are independent of elasticity of second sector good σ 2.

9 Main Result We show that: Nominal wages and price indices of rst sector are the same as in Krugman model, (ii) Price indices of second sector are equal and do not depend on endogoeneous mobile worker share in each country. It implies following Proposition: Proposition The bifurcation diagram, and therefore the pattern of long-run equilibria, is independent of whether the second sector is governed by perfect or monopolistic competition.

10 Trade ows The only dierence in result is trade ows. In classical model - only one country exports second sector (homogeneous) good. In this model - both countries export second sector (dierentiated) good because of love for variety.

11 Trade ows By a trade ow T ij we mean gross imports value from country i to country j: T FH = 1 µ 2 T HF = 1 µ ( 2 ( λ Lw H 1 + L 2 2 ), (1 λ)lw F 1 + L 2 2 This implies that: Trade ows are independent of any characteristics of the second sector (including σ 2 ) The classical model is obtained from ours as a limiting case when σ 2. ). This result holds under assymetric quantities of second sector workers.

12 Free entry The equilibrium price and elasticity of substitution under Cournot and Bertrand oligopoly are given by p = cε ε 1 ; 1 = ) (1 ε Cournot σ 1σ2 ; ε Bertrand = σ 2 σ 2 1, 2 N N Free entry provides the same number of rms N in the economy Consequently, prices for the second-sector-produced goods in both countries are equal The same holds for second sector goods' price indices Oligopoly with free entry results in the same pattern of long-run equilibria

13 Conclusion We have found out that the set of long-run equilibria has the same structure under perfect, monopolistic or oligopolistic competition. There are two key-factor of this result: Cobb-Douglas-over-CES specication of preferences, which leads to markets' separation. Free entry. This result is very unlikely to hold under alternative specications and/or oligopoly settings without free entry.

14 Thank you for your attention!

Microeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy

Microeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy Microeconomics Claudia Vogel EUV Winter Term 2009/2010 Claudia Vogel (EUV) Microeconomics Winter Term 2009/2010 1 / 25 Lecture Outline Part III Market Structure and Competitive Strategy 12 Monopolistic