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Journal of Economic Integration 2002 April;17(4) :671-686.
Firm Location, Trade and Economic Integration

Joaquín AndaluzAgustín Gil 

University of Zaragoza
Copyright ©2002 Journal of Economic Integration
The aim of this paper is to analyse how a process of economic integration between two adjacent countries with different transport costs (different levels of development) affects firms' decisions on location and prices. Considering the situation where one firm is located in each country and manufactures a product that is imported by the more developed country, we find that when there are barriers to trade one of the firms tends to locate on the common frontier and the other at the far extreme. By contrast, with full economic integration, both firms tend to maximise differentiation, locating themselves at the non-neighbouring extremes, which leads to higher prices and profits. Therefore, the firm located in the more developed country increases its market share. JEL Classifications (F150, L130, R320)
Keywords: Market Integration | Price-Location Competition | Transport Costs
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