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Haufler, Andreas and Wooton, Ian (March 2007): Competition for Firms in an Oligopolistic Industry: Do Firms or Countries Have to Pay? Discussion Papers in Economics 2007-13 [PDF, 305kB]

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We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration 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 where economic integration raises the welfare of the small country, but lowers welfare in the large country.

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