chapter  4
5 Pages

A decomposition of the home market effect

Before moving to the trade equilibrium, it is important to note the entry-exit process. If, in the short-run, the demand for a differentiated product exceeds the long-run equilibrium output, x, there are positive profits, which creates an incentive

for new firms to enter the industry. Conversely, if the short-run demand is smaller than x, some firms will exit. This entry-exit process plays an important role in determining the degree of the home market effect.