The Home Market Effect under Constant Returns and Monopolistic Competition

Abstract

Most existing theoretical studies on home market effects depend crucially on the assumption of increasing returns to scale technology. This paper studies the consequences of the absence of increasing returns to scale on home market effects by employing a constant returns monopolistic competition model. This paper demonstrates that home market effects can emerge or disappear depending on the magnitude of the elasticity of substitution and transport costs even in the constant returns model with firm mobility. In particular, a reverse home market effect can result when the elasticity of substitution is low and transport costs are high.