COMPETITION FOR FIRMS IN AN OLIGOPOLISTICINDUSTRY : DO FIRMS OR COUNTRIESHAVE TO PAY?

We set up a model of generalised oligopoly where two countries of different size compete foran exogenous, but variable, number of identical firms. The model combines a desire bynational governments to attract internationally mobile firms with the existence of locationrents that arise even in a symmetric equilibrium where firms are dispersed. As economicintegration proceeds, equilibrium taxes decline, switching from positive to negative levels,and then rise as trade costs fall even further. A range of trade costs is identified whereeconomic integration raises the welfare of the small country, but lowers welfare in the largecountry.