Capital-Intensive Country-Specific Network Costs and Intra-Industry Trade

This paper examines the impacts of country-specific network costs that are provided by a capital-intensive communications sector in a two-country two-factor model, where there are two trading sectors, agriculture and manufacturing. It is shown that when firms in the manufacturing sector incur a fixed cost associated with connection to the communications network upon entry, comparative advantage will be determined by the relative endowments of capital in each country and the size of fixed costs associated with the communications sector. The capital abundant (scarce) country will have a comparative advantage (disadvantage) when the cost-sharing effect (the congestion effect) dominates.