Industrial Structure , Trade and Regional Economics : Market Seg - mentation

We consider a general equilibrium model a la Bhaskar (Review of Economic Studies 2002): there are complementarities across sectors, each of which comprise (many) heterogenous monopolistically competitive …rms. Bhaskar’s model is extended in two directions: production requires capital, and labour markets are segmented. Labour market segmentation models the di¢ culties of labour migrating across international barriers (in a trade context) or from a poor region to a richer one (in a regional context), whilst the assumption of a single capital market means that capital ‡ows freely between countries or regions. The model is solved analytically and a closed form solution is provided. Adding labour market segmentation to Bhaskar’s two-tier industrial structure allows us to study, inter alia, the impact of competition regulations on wages and …nancial ‡ows both in the regional and international context, and the output, welfare and …nancial implications of relaxing immigration laws. The analytical approach adopted allows us, not only to sign the e¤ect of policies, but also to quantify their e¤ects. Introducing capital as a factor of production improves the realism of the model and re…nes its empirically testable implications. JEL Classi…cation Nos : F22, L11, F16, R13 Keywords : market segmentation, monopolistic competition, industry competition, regional competition, capital ‡ows 1. INTRODUCTION Our work mainly focus on two points, both relevant in current economic studies: demand elasticity heterogeneity across sectors and labour market segmentation. In the market, we generally …nd goods that are subject to di¤erent degrees of substitutability. This may be due to several reasons: the number of …rms operating in an industry, the elasticity of substitution in consumption between products, the information level on the goods, and market regulations in each sector. Demand elasticity and then markup heterogeneity has been studied by F.Bilbiie,F. Ghironi and M. Melitz (2006), that prove that e¢ ciency requires markups to be synchronized across goods, and resources are ine¢ ciently 1Department of Economics, Adam Smith Building, Glasgow, G12 8RT. email: [email protected] and [email protected]