DP3454 On the Pervasiveness of Home Market Effects

• Thierry Mayer Keith Head John Ries
20 Jul 2002

Krugman?s (1980) model of trade predicts that the country with the relatively large
number of consumers is the net exporter and hosts a disproportionate share of firms in
the increasing returns sector. He terms these results 'home market effects'. This Paper
analyzes three additional models featuring increasing returns, firm mobility, and trade costs
to assess the robustness of home market effects to alternative modeling assumptions. We
find strikingly similar results for two of the models that relax assumptions about the nature
of demand, competition, and trade costs. A model that links varieties to nations
rather than firms can, however, generate opposite results.