International Trade with Increasing Returns in the Transportation Sector

Abstract

In this general equilibrium framework, the transportation sector is modeled as a distinct sector with increasing returns. A more advanced technology has a higher fixed cost but a lower marginal cost of production. Even with both manufacturing firms and transportation firms engage in oligopolistic competition and choose technologies optimally, the model is tractable and results are derived analytically. Technology adoptions in the manufacturing sector and in the transportation sector are reinforcing and multiple equilibria may exist. Firms choose more advanced technologies and the prices decrease when the size of the population is larger.

The partition of production between households and markets

“…The number of firms is determined by the zero-profit condition. See Liu and Wang (2010) andZhou (2004Zhou ( , 2009Zhou ( , 2013Zhou ( , 2014aZhou ( , 2014b for models that firms engaging in Cournot competition earn zero profits.…”