Intra-industry Trade and the Gravity Equation: A Cournot-Ricardo Approach
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This paper shows that Cournot competition in segmented markets generate both intra-industry trade and the gravity equation. The paper also demonstrates that the gravity equation holds if and only if the market shares of an exporting country do not depend on the market where it sells. Thus, the widely accepted wisdom that specialization generates the force of gravity is not well grounded on theory.
Abstract
This paper shows that Cournot competition in segmented markets generate both intra-industry trade and the gravity equation. The paper also demonstrates that the gravity equation holds if and only if the market shares of an exporting country do not depend on the market where it sells. Thus, the widely accepted wisdom that specialization generates the force of gravity is not well grounded on theory.