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Differentiation, labor market and

globalization
Amal Hili, Rim Lahmandi-Ayed & Hejer Lasram
To cite this article: Amal Hili, Rim Lahmandi-Ayed & Hejer Lasram (2016):
Differentiation, labor market and globalization, The Journal of International
Trade & Economic Development, DOI: 10.1080/09638199.2015.1136832
To link to this article: http://dx.doi.org/10.1080/09638199.2015.1136832

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The Journal of International Trade & Economic Development, 2016 http://dx.doi.org/10.1080/09638199.2015.1136832

Differentiation, labor market and globalization

Amal Hili
c∗
aUnit ́ e MASE-ESSAI, ISG-Sousse, Universit ́ e de Sousse, Tunisia and Laboratoire EPEE, Paris-Saclay University, France;
bUnit ́ e MASE-ESSAI and ESSAI, Universit ́ e de Carthage, Tunisia; cUnit ́ e MASE-ESSAI, IHEC, Universit ́ e de Carthage,
Tunisia and Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, France
(Received 17 June 2015; accepted 24 December 2015)
We consider two countries with initially one firm in each country and the possibility for each firm to invest in the other country
or commercialize its products, and for workers to immigrate (Common Labor Market; CLM). In- terestingly, when firms compete
on the product market with no competition on the labor market (Goods’ Mobility; GM), they do not differentiate their qualities.
However, when competition is introduced in both markets (Foreign Investment; FI) firms differentiate their products. We
compare the globaliza- tion scenarii and prove that they improve the global social welfare relative to autarky and that a
cooperative choice by countries of a globalization scenario would lead to GM.
Keywords: Vertical differentiation; labor market; globalization; foreign in- vestment; common labor market; goods’ mobility
JEL Classifications: F2, F12, J4, L13
1. Introduction Most studies which deal with globalization distinguish three main forms of mobil- ity between
countries: goods’ mobility (GM), workers’ mobility and capital mobil- ity. Traditional trade theory considers that in
the long term these three dimensions of globalization are substitutes (Xenogiani 2006; Ranis 2007). However, in
prac- tice, according to Ranis (2007) governments tend to encourage export (GM) and foreign investment (FI;
capital mobility) but they implement barriers to workers’ mobility using, for example, residence permits, work
permits or visas. This strong political resistance to workers’ mobility is explained by the fact that governments wish
to protect domestic workers from immigrants (Ranis 2007). One question of interest is whether this preference is
theoretically founded in social welfare terms. Most of theoretical studies analyzing the impact of globalization on
social
∗
Corresponding author. Email: hejer_lasram@hotmail.com
C 2016 Taylor & Francis
a, Rim Lahmandi-Ayed
b and Hejer Lasram
2 A. Hili et al.
welfare focused on GM, ignoring workers’ and capital mobility (Gabszewicz et al. 1981; Brander and Spencer 1988;
Lambertini 1997; Cabrales and Motta 2001; Fajgelbaum 2013). Moreover, addressing this question jointly with
vertical differentiation and labor market is still largely under-explored in the literature.
Our paper fills a gap by considering these issues through a simple model analyzing jointly vertical
differentiation, labor market and globalization, in terms of GM, workers’ mobility and capital mobility. Starting
from the benchmark of two countries in autarky with a monopoly in each country, we introduce globalization
considering, respectively, three situations: GM, Common Labor Market (CLM; workers’ mobility) and FI (capital
mobility). We characterize equilibrium in these cases and compare them from the viewpoint of workers, consumers,
producers and the social planner.
Depending on the considered globalization scenario, there is either competition on the product market (GM) or
on the labor market (CLM) or on both markets (FI). On the one hand, competition on the product market results in
two effects: a direct effect on prices (decreasing) and on demands (increasing) and an indirect increasing effect on
wages and employment (resulting from higher demands). On the other hand, competition on the labor market leads
as well to two effects: a direct increasing effect on wages and employment resulting in an indirect effect on product
supply (increasing) and prices (decreasing).
We prove that, when there is competition on the product market with no competition on the labor one (GM) the
incentive for firms to vertically differentiate is not strong enough: at equilibrium they choose the same quality. This
result is different from the standard vertical differentiation model’s one. However, under FI, as competition is
introduced on the labor market, firms differentiate their qualities. We also prove that globalization is always welfare
improving relative to Autarky. Interestingly, we prove that workers prefer capital mobility (FI) and GM to their own
mobility. Indeed, the indirect effect on wages when competition is introduced on the product market, is higher than
the direct one resulting from competition on the labor market. We also prove that producers prefer workers’ mobility
(CLM) to capital one (FI) as their total surplus decreases under FI relative to CLM due to the negative effect of
product competition on prices.
Related literature. Rare are articles which consider jointly the three aspects: trade, labor market and
differentiation. Numerous papers consider, however, these aspects two by two. A first set of papers deals with
international trade within a vertically differentiated market (Gabszewicz et al. 1981; Shaked and Sutton 1983; Flam
and Helpman 1987; Chang and Kim 1989; Motta 1992; Cabrales and Motta 2001; Lin and Wu 2013; Kovac and
Zigic 2014). A second set of papers combines labor market and international trade (Galor 1986; Giannetti 2002 ;
Lambertini 2002; Bastos and Straume 2012; Fajgelbaum 2013; Stijepic 2015). Finally, a third set of articles deals
with labor market under differentiation as Lutz and Turrini (2000), Gabszewicz and Turrini (1999, 2000) and
Bacchiega (2007). The two last papers, as in our model, consider a partial equilibrium model with vertically
differentiated goods, where quality is positively linked to workers’ qualifications
The Journal of International Trade & Economic Development 3
and/or efforts. Gabszewicz and Turrini (1999, 2000) assume, as in our paper, that firms and workers are wage takers
and use the labor market clearing condition to determine the equilibrium wages. But in our paper, we suppose that
firms choose qualities and prices anticipating labor market equilibrium, while Gabszewicz and Turrini (1999, 2000)
write the market clearing condition once the game is solved in terms of prices and qualities for each value of wages.
As for Bacchiega (2007), he supposes that wages result from bargaining. Unlike our paper, Gabszewicz and Turrini
(1999, 2000), as well as Bacchiega (2007) have distinguished between skilled workers (necessary to produce the
high-quality variety) and unskilled ones. According to their models, the quality’s choice depends on the availability
of qualified workers on the labor market, which is not relevant in our paper. Indeed we assume, on the one hand, that
the mass of workers is sufficiently high to avoid the problem of qualified workers’ availability. On the other hand,
the product quality’s choice by firms imposes the workers’ required skills. Finally Hili, Lahmandi- Ayed, and
Lasram (2015) consider the same assumptions but without considering globalization issues.
To the best of our knowledge, Cordella and Grilo (1998) and Bacchiega (2013) are the only papers which
consider jointly labor market, vertical differentiation and globalization.
Cordella and Grilo (1998) consider two domestic firms in a vertically dif- ferentiated market hiring local
workers at an exogenous local wage. The authors introduce globalization allowing both firms to serve the local
market through for- eign plants (FI). When firms choose to relocate, they incur fixed relocation costs and employ
foreign workers at a given foreign wage. The authors focus their analy- sis on the globalization cost effect (wages
and fixed relocation costs) on the firms’ relocation decision, considering quality as an exogenous variable. In our
paper, we also consider FI, but contrary to Cordella and Grilo (1998), we assume two countries with a monopoly in
each and introduce globalization allowing each firm to produce and sell in the domestic and foreign markets dealing
with the global- ization effects on qualities, demands, prices and wages. In addition, we explicitly analyze the
equilibrium of labor market considering that wages are determined by balancing labor supply and demand. Contrary
to Cordella and Grilo (1998), we prove that FI is always welfare improving compared to Autarky.
Bacchiega (2013) considers a model closer to ours allowing trade between two countries. In the first country,
there are skilled and unskilled workers while the second one provides only unskilled workers. The high-quality
variant of the product is produced by the skilled labor and the low-quality one by either skilled or unskilled labor.
The author supposes that unskilled workers are wage takers, and that wages for skilled workers are determined
through a bargain- ing process between unions and firms. In our model, we suppose a continuum of workers in each
country differing by their sensitivity to effort, and wages are determined such that the supply balances the demand
on the labor market. Moreover, Bacchiega (2013) supposes that only goods can flow between coun- tries
disregarding labor mobility and FI. In contrast with our results, the author
4 A. Hili et al.
proves that losses might arise from trade liberalization (comparable to GM in our model).
The remaining of the paper is organized as follows. Section 2 describes the model, the basic one then the model
with globalization and provides the outcome in the autarkic case. In Section 3, we introduce globalization solving
the model for GM, CLM and FI. In Section 4, we discuss our results and compare two by two the three globalization
scenarii and Autarky. Section 5 concludes the paper.
2. The model and preliminary calculations We first introduce the basic model which links in an original way labor
and quality in a vertical differentiated market. Then, we describe formally the three considered scenarii of
globalization. Finally, we provide the outcome in the autarkic case which will serve as a benchmark for the
considered globalization scenarii.
2.1. The basic model We consider a vertically differentiated market with a segment of consumers and a segment of
workers. It is a partial equilibrium model with workers and consumers potentially not identical.
The consumers. The quality is desirable from the viewpoint of consumers. As in Mussa and Rosen (1978), the
indirect utility of a consumer buying one unit of product q
i
from Firm i at price p
i
, is given by
V
i
(θ) =
{
θq
i
−p
i
if he/she buys one unit of product, 0 if he/she buys nothing.
Consumers are uniformly distributed over the segment [0,θ], with a density normalized to 1. Each consumer is
assumed to buy one unit of the product from the firm that ensures to him/her the best utility if this utility is positive,
otherwise he/she buys nothing.
The workers. In order to produce a higher quality product a worker needs to incur larger training costs and spend
a larger part of his/her life to acquire skills, thus quality is not desirable from the viewpoint of workers. For
simplicity sake, we assume that the worker’s effort equals the product quality, (i.e. the labor market adapts to the
firms’ needs).
Formally, a worker employed by Firm i and perceiving the wage (and diverse advantages) ω
i
has the utility1
U
i
(α) = ω
i
− αq
i
,
where α characterizes intrinsically the worker and is uniformly distributed over the segment [0,α]. A higher α
reflects a more sensitive worker to effort as he/she is more negatively affected by a given level of effort. Parameter α
is assumed to
The Journal of International Trade & Economic Development 5
be sufficiently high, so that there is never a problem of workers’ availability. A worker who does not work has
utility, U
i
= 0. We assume that one unit of product requires one labor unit. Hence, the
demand for labor equals the product demand. We finally assume that workers and firms are wage takers and that the
equilibrium wage is determined according to the market clearing condition.
The game. The game is organized as follows:
• In the first step, firms choose qualities (or equivalently the required efforts) q
i
in some given interval [q,q].
• In the second step, firms choose their prices p
i
anticipating equilibrium between the supply and demand on the
labor market.
2.2. The model with globalization In the international version of the model, we consider two identical countries2
(i=1, 2). In each considered country, there are consumers and workers as described in the basic model.
In Autarky (A), there is one firm in each country (Firm i belongs to Country i), selling locally one product and
employing local workers. We consider three ways to open countries internationally.
(1) Goods’ Mobility (GM): each firm produces only in its own country and exports the same quality at the same
price to the other, but workers cannot move; i.e. there is competition on the product market but no competition on
the labor market. (2) Common Labor Market (CLM): each firm is a monopoly in its own country on the product
market, but workers have the possibility to move between countries; i.e. there is competition on the labor market but
no competition on the product market. (3) Foreign Investment (FI): each firm is present in each country, producing
and selling its product in each country. Hence, there is competition on both labor and product markets. We assume
that each firm sells the same quality at the same price in both countries.
2.3. Autarky In each country, we consider a monopoly firm which locally produces and sells a product. Proposition
2.1 provides the equilibrium outcome in this case which will serve as a benchmark for the considered globalization
scenarii. The proof is provided in Appendix A.
6 A. Hili et al.
Proposition 2.1 (Autarky): In autarky, the monopoly chooses quality q(A) = q, price p(A) = 3 4
θq and wage ω(A) =
θq 4
, making the profit π(A) =
θ
82
q
. The employment level is L(A) = θ 4
.
Not surprisingly, we obtain the standard result in a model of vertical differenti- ated monopoly, where the firm
maximizes its quality at equilibrium. The surpluses of different types of agents are provided in Result 5 in Appendix
A.
3. Globalization In this section, we introduce globalization through three scenarii: GM, CLM and FI and calculate
for each the equilibrium outcome in terms of qualities, prices, wages, profits and employment levels. The surpluses
in each globalization scenario for consumers S
C
, workers S
L
, producers S
P
and social planners SW are provided in Table B1 of Appendix B. All
proofs are given in Appendix A.
Before going further, we point out the direct and indirect effects of competition on the labor and product
markets, on prices, wages, demands and labor levels. Depending on the considered globalization scenario, there is
either competition on the product market (GM) or on the labor market (CLM) or on both markets (FI). On the one
hand, competition on the product market results in two effects: a direct effect on prices (decreasing) and on demands
(increasing) and an indirect increasing effect on wages and employment (resulting from higher demands). On the
other hand, competition on the labor market leads as well to two effects: a direct increasing effect on wages and
employment resulting in an indirect effect on product supply (increasing) and prices (decreasing).
In terms of quality choice, we are going to prove that in the GM and CLM scenarii both firms choose the highest
quality at equilibrium, but differentiate their products in the FI scenario. To explain these results, we identify the
reasons that urge firms to differentiate their products. Assume that a firm fixes its quality at the highest level. Focus
on the low-quality firm. When there is competition on the product market, as the lowest quality firm raises its
quality, it raises its demand, but it reduces quality differentiation leading to a fiercer price competition. In a standard
vertical differentiation model, this last effect is the strongest, discouraging the lowest quality firm from coming too
close to its competitor. But in this model, the direct effect on product demands raises the labor demands and wages,
which has a positive effect on prices. This second indirect effect softens price competition for close products, thus
encouraging the lowest quality firm to raise its quality. This explains why firms do not differentiate their products in
the GM case.
When there is competition on the labor market only (CLM), too close products have no effect on the product
market, where each one is a monopoly but entail indirect competition on wages which is not strong enough as firms
are not strategic in their choice of wages (wage-takers). There are not sufficient reasons for firms to differentiate
their products.
The Journal of International Trade & Economic Development 7
When there is competition on the product and labor markets, firms are more strongly encouraged to differentiate
their products. Indeed, too close products lead to lower prices due to a fiercer price competition and to higher wages
due to fiercer competition for labor. This explains why firms differentiate their products in the FI case.
Next, we give calculations and results in a more formal way for each global- ization scenario. All proofs are
given in Appendix A.
3.1. Goods’ mobility In this scenario, each firm produces in its own country but commercializes its product in both
countries offering the same quality at the same price in local and export markets. Workers are assumed not to move.
Hence for each firm, there is a product demand in each country, but labor is offered only in its own one. Thus,
demand for product (labor) is doubled for each firm but the labor supply remains the same as in Autarky.
Proposition 3.2 provides the equilibrium outcome in this case. Corollary 3.1 compares Autarky and GM outcomes.
Proposition 3.2 (Goods’ Mobility): At equilibrium of the GM scenario, Firm i (from Country i, i = price p
i
= p(GM) = 1, 2) sells quality 2
3
θq and pays in its q i = q(GM) = q in both countries country the wage ω
i
= ω(GM) = at
13
θq, making the profit π
i
2
q. The employment level in Country i is given by: L
i
= π(GM) = L(GM) = 1
3
θ.
=19
θ
In the GM case, there is competition on the product market but no compe- tition on the labor one. At
equilibrium, firms do not differentiate their products both choosing the highest quality. It is worth noting that there
is a unique price equilibrium in the case of different qualities. As for the case of equal qualities, the subgame in
prices admits a continuum of equilibria (Lemma A.1 of Appendix A). We naturally select the equilibrium
corresponding to the limit of price equilibrium obtained in the case q
1
<q
2
, as the difference between qualities converges to zero. We also prove in the discussion
of the selection rule in Appendix A, that this selection rule Pareto-dominates all the other ones, which makes this
selection less arbitrary as firms would choose it, if they have the possibility of coordinating their choices, remaining
nevertheless in a non-cooperative approach.
This equilibrium is different from the one obtained with the standard vertical differentiation model (Anderson,
De Palma, and Thisse 1992), where firms differ- entiate their products to soften competition, but is in line with the
one obtained with capacity commitment (Boccard and Wauthy 2010), where differentiation is inhib- ited by capacity
constraints. Here, differentiation is inhibited by cost constraints (wages), as explained earlier.
Interestingly, note that at equilibrium firms charge prices above their marginal costs, earning non-zero profits
while they send perfect substitutes, which is in contradiction with Bertrand Paradox. Indeed, in the Bertrand’s
model, the firms do
8 A. Hili et al.
not have to consider the labor side as there are no interactions between labor and product markets. In addition, the
costs are exogenous. In our model, on the one hand, the demand of labor is equal to the demand of product. On the
other hand, salaries which are firms’ costs are endogenous. Hence, when a firm undercuts its rival it receives all the
product demand but must offer a suddenly higher wage to be able to face this demand by attracting sufficient labor.
This phenomenon inhibits profit destructive competition. Similar phenomena are observed with congestion and
capacity commitment (Boccard and Wauthy 2010; Ben Elhadj, Jebsi, and Lahmandi-Ayed 2012 ).
In the case of equal qualities, as shown in Lemma A.1 (equation (1)) the demand is discontinuous in prices.
Firms share the total demand when they charge the same price. When one firm charges a price lower than its
competitor’s one (even very slightly) it attracts all the demand and must double the wage to be able to produce the
demanded quantity (equation (3)). This discourages firms from lowering too much their prices. Lemma A.1 is
proved through two steps: in the first step, price equilibria are identified proving that no unilateral deviation is
profitable. In the second step, we prove that all the other couples are not equilibria.
Corollary 3.1: Comparison between Autarky and the GM scenario for the global world, gives
(1) For qualities, prices, employment and wages:
q(A) = q(GM), p(A) > p(GM), L(A) < L(GM), ω(A) < ω(GM).
(2) For consumers, producers, workers and the social planner:
• S
C
(A) < S
C
(GM),
• S
P
(A) > S
P
(GM),
• S
L
(A) < S
L
(GM),
• SW(A) < SW(GM).
Compared with Autarky, competition on the product market reduces prices and enhances the demand for
products, thus increasing consumers’ satisfaction. As for workers, a higher demand for products generates a higher
demand for labor, hence higher wages and employment levels. For producers, due to less competition, Autarky
ensures higher profits than GM. Considering all the interests, GM provides a higher level of social welfare than
Autarky.
This result is in line with Motta (1992) and Cabrales and Motta (2001). They prove that under country size
asymmetry (in terms of population), both small and large countries gain from free trade and possible producers’
losses might be out- weighed by consumers’ gains. But the authors focus on producers’ and consumers’ surpluses
ignoring workers. Our results confirm Motta (1992) and Cabrales and
The Journal of International Trade & Economic Development 9
Motta (2001) outcomes even if we take into account workers’ satisfaction in the total social welfare.3
Using a model closer to ours, Bacchiega (2013) proves that losses might arise from trade liberalization
equivalent to our GM case. The author considers work- ers’ surplus in his welfare analysis but assumes asymmetries
in human capital’s structure. Bacchiega (2013) distinguishes between skilled and unskilled workers and supposes
that one country provides both unskilled and skilled workers while the other provides only skilled ones. In addition,
the author assumes that unskilled workers are wage takers and that the wage for skilled workers is determined
through a bargaining process between firms and unions. This turns out to be the key difference with our model.
Indeed, losses from trade liberalization depend mainly on the degree of unionization and on the market expansion of
the country which provides skilled workers.
3.2. Common labor market We now assume that each firm is a monopoly on the product market in its own country,
i.e. there is no competition on the product market. But workers may move between countries, which gives them the
choice to work either in the local firm or abroad (but without moving cost), thus there is competition on the labor
market. As a consequence, the supply of labor is doubled whereas the demand for product remains the same
compared to Autarky. The equilibrium outcome is given in Proposition 3.3. Proposition 3.3 (Common Labor
Market): At equilibrium of the CLM scenario, Firm i (from Country market at price p
i
= i, i = 1, 2) sells its quality p(CLM) = 5
7
θq and pays q i the = q(CLM) wage ω
i
= q on the local = ω(CLM) = 2 7
θq, making the profit π
i
2
q. The level of employment in Country i is given by, L
i
= π(CLM) = L(CLM) = = 2
7
θ.
49 6
θ
Corollary 3.2 compares CLM and Autarky outcomes. Corollary 3.2: Comparison between Autarky and CLM for
the global world gives
(1) For qualities, prices, employment and wages:
q(A) = q(CLM), p(A) > p(CLM), L(A) < L(CLM), ω(A) < ω(CLM).
(2) For consumers, producers, workers and the social planner:
• S
C
(A) < S
C
(CLM),
• S
P
(A) > S
P
(CLM),
• S
L
(A) < S
L
(CLM),
• SW(A) < SW(CLM).
10 A. Hili et al.
Under the CLM scenario, competition on the labor market enhances wages and employment levels (demand for
labor). Indeed, in our model, the wage level determines the quality and quantity of labor globally available for
production, and thus the total amount of good that can be produced by the firms, namely productive capacity.4 On
the other hand, a higher demand for labor generating a higher product’s supply reduces prices. Hence, consumers
and workers are better off with CLM than Autarky but producers prefer Autarky to CLM. Despite profit’s
deterioration, total surplus with CLM is higher than with Autarky (due to a better satisfaction of workers and
consumers) as it is the case in Galor (1986) in the steady-state equilibrium case.
3.3. Foreign investment In this scenario, each firm produces and sells its product in each country. Workers are
assumed to be unable to move between countries but have the choice to work either in the local firm or in the
foreign one established in their country. Hence, firms compete on the product market as duopolies and on the labor
market as duopsonies. Due to the specific modeling assumptions of the paper, in particular to the absence of
transportation costs, this scenario is strictly formally equivalent to a mixture of the two previous globalization
scenarii: goods’ and workers’ mobility. Proposition 3.4 provides the equilibrium outcome for each country. Recall
that each firm sells the same quality at the same price in both countries. Denote by q
i
,p
i
,ω
i
andπ
i
, respectively, the quality, price, wage and profit of Firm i (i = 1, 2) in both countries. Proposition 3.4
(Foreign Investment): The equilibrium outcome of the FI sce- nario is asymmetric and given by
Firm i Firm j
Qualities Prices p
q
i
(FI) i (FI) = = 28 9
47
̄q q
j
(FI) = ̄q (FI) Wages θq ω
i
(FI) = θq 4
p
j
(FI) = = 5 8
3θq
θq
8 Profits π
i
ω
j (FI) = θ
2
q 48
π
j
(FI) = 7θ
2
q 48
The mirror equilibrium also holds.5
The employment level in each country is given by L(FI) = 16 7
θ.
Corollary 3.3 compares Autarky and FI outcomes. Corollary 3.3: Comparison between Autarky and the FI case
for the global world, gives
(1) For qualities: q(A) > q
1
(FI) and q(A) = q
2
(FI). (2) For prices: p(A) > p
1
(FI) and p(A) > p
2
(FI).
The Journal of International Trade & Economic Development 11
(3) For employment and wages: L(A) < L(FI)andω(A) = ω
1
(FI), ω(A) < ω
2
(FI). (4) For consumers, producers, workers and the social planner:
• S
C
(A) < S
C
(FI),
• S
P
(A) > S
P
(FI),
• S
L
(A) < S
L
(FI),
• SW(A) < SW(FI).
Compared with Autarky, competition is introduced in both labor and prod- uct markets. Competition on the
product market reduces prices and increases the product’s demands, increasing the labor demand, thus increasing
wages. Compe- tition on the labor market increases wages and employment, which enhances the product’s supply
(one additional unit of labor produces one additional product unit) and reduces prices. Due to this double effect on
prices and wages, consumers and workers are clearly better off with FI than Autarky. As for producers, the firm
offering the highest quality improves its profit, while the other, offering the lowest quality at the lowest price, has a
lower profit. The total profit is, however, lower with FI relative to Autarky, the lowest quality firm losing more than
is gained by the highest quality one. The loss in producers’ surplus is, however, compensated by the gain in
workers’ and consumers’ surpluses and the social welfare is higher in the FI case relative to Autarky. This is not in
line with Cordella and Grilo (1998)’s results, who prove that FI is not welfare improving compared with Autarky.
4. General comparison In this section, we compare the studied scenarii, two by two, in terms of consumers’
satisfaction, scenarii in workers’ Table B2 of surplus, Appendix global B. profit Denote and by
total C ̄
surplus. We classify various and C, respectively, the no competition and competition cases. The first scenario
corresponds to the autarkic situation (A) with no competition on both product and labor markets. Moving to the
right, competition is introduced on the labor market and there is still no competition on the product market, which
corresponds to CLM. GM corresponds to competition on the product market with no competition on the labor one.
 Finally, FI implies competition on both markets.
Comparison for workers, consumers, producers and the social planner are provided, respectively, in Results 1–4
followed by interpretations. The proofs stem simply from the comparison of the equilibrium values of each type of
economic agent summarized in Table B1 of Appendix B.
Result 4.1 (Workers):Comparing for workers, Autarky and the three globalization scenarii, we have
• for employment: L(FI) > L(GM) > L(CLM) > L(A),
• for workers’ surplus: S
L
(GM) > S
L
(FI) > S
L
(CLM) > S
L
(A).
12 A. Hili et al.
Interestingly, workers prefer GM and FI to CLM. This means that they prefer the mobility of goods and capital
to their own one.
Result 4.2 (Consumers): Comparing for consumers, Autarky and the three glob- alization scenarii, we have
S
C
(FI) > S
C
(GM) > S
C
(CLM) > S
C
(A).
Consumers prefer FI to all other scenarii.
Result 4.3 (Producers): Comparing for producers, Autarky and the three global- ization situations, we have
S
P
(A) > S
P
(CLM) > S
P
(GM) > S
P
(FI).
Firms prefer Autarky to any form of globalization, which is natural as Autarky avoids competition on both
markets. Among the three considered globalization scenarii, firms prefer GM and CLM to FI, which means that
firms prefer the mobility of goods and workers to the mobility of capital.
Result 4.4 (Social welfare): Comparing in terms of social welfare, Autarky and the three globalization scenarii, we
have
SW(GM) > SW(FI) > SW(CLM) > SW(A).
Considering all interests (consumers, workers, firms), GM provides the highest social welfare level, before FI,
then CLM, Autarky being the worst scenario in social terms.
To interpret Results 1–4, we make pair wise comparisons of the three glob- alization scenarii, using Table B2 of
Appendix B which classifies them in terms of competition or not on each market (labor and product markets) and
focusing on the full effects of competition on each market on prices, demands, wages and employment. Competition
on the labor market enhances wages and employment levels (direct effects). But a higher demand for labor generates
a higher product’s supply, which reduces prices (indirect effects). Competition on the product mar- ket reduces
prices and enhances the demand for products (direct effects), which results in an increase in demand of labor,
resulting itself in an increase of wages and employment levels (indirect effects).
Comparing CLM with GM, consumers are better off with GM (direct effects of competition on the product
market). As for workers, the indirect effect of com- petition on the product market on wages and employment is
higher than the effect of direct competition on the labor market. Hence, workers prefer GM to their own one. For
producers, CLM ensures a greater profit, insofar as this scenario leads to higher prices and lower wages than GM.
These effects on prices and wages offset the demand decrease compared to GM. Hence, producers prefer CLM to
GM.
The Journal of International Trade & Economic Development 13
Moving from CLM to FI amounts to add competition on the product market, which improves consumers’
satisfaction and workers’ surplus. As for producers, due to the introduction of competition on the product market
resulting directly in lower prices and indirectly in higher wages, FI procures a lower total profit than CLM. More
precisely, the overall effect is positive for the highest quality firm which makes in the FI scenario a profit higher
than the profit common to both firms under CLM; and negative for the lowest quality firm which makes a lower
profit.
Moving from the GM scenario to the FI one amounts to add competition on the labor market. Recall that there is
no differentiation under GM, while products are differentiated under FI. As we have already explained, competition
on the labor market enhances employment, workers’ and consumers’ satisfaction. Hence, workers and consumers
are better off with FI than with GM. However, producers realize globally higher profits under GM than FI (direct
effect on wages of competition on labor market).
5. Discussion and conclusion We introduced and analyzed a new partial equilibrium model linking vertical
differentiation and the labor market in four cases: Autarky, GM, CLM and FI. Then, we compared the four scenarii
from the viewpoint of workers, consumers, producers and the social planner.
Interestingly, we prove that in the case of GM, i.e. when firms compete on the products market with no
competition on the labor one, they choose not to differentiate their product. Not surprisingly, no differentiation
obtains also in the CLM case, where there is competition only on the labor market. However, when competition
occurs on both markets, i.e. under FI, firms choose to differentiate their products. Interestingly, we prove that
workers prefer GM and FI to their own mobility (CLM) and that producers prefer workers’ mobility (CLM) to
capital mobility (FI). Moreover, we prove that globalization is always welfare improving relative to Autarky and
that among the three globalization scenarii, CLM ensures the lowest level of welfare. Hence, we could conclude that
the governments’ policy with regard to globalization, encouraging GM and FI rather than CLM, is theoretically
founded.
As we consider a partial equilibrium model, the two populations of consumers and workers are separate, which
may be a good approximation of an economy, where the considered sector is marginal in the labor market. As a
perspective, one may consider a general equilibrium model, where individuals who possess the firms are
consumers/workers and have to decide which product to buy and in which firm to work.
Acknowledgments Authors are grateful to Didier Laussel for his helpful comments and suggestions. Amal Hili gratefully
acknowledges the financial support to present this paper at the ETSG Conference, from the World Trade Organization Chair at
Tunis Business School.
14 A. Hili et al.
Disclosure statement No potential conflict of interest was reported by the authors.
Notes 1. As De Fraja (1999). 2. This assumption could be warranted by the OECD’s report (2010) according to which
intra-industry trade is likely to occur among countries having similar development levels and economic structures. 3. Motta
(1992) introducing in addition sunk costs, proves that losses may arise from
liberalization. 4. We thank one of the referees for his interesting remark. 5. In which Firms i and j play the reverse roles.
ORCID Amal Hili
http://orcid.org/0000-0001-6079-4090 Rim Lahmandi-Ayed
http://orcid.org/0000-0002-6427-4778 Hejer Lasram
http://orcid.org/0000-0003-2608-070X
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Appendices Appendix A
Proof of Proposition 2.1. A worker is better off working whenω −αq>0. Hence, the segment of employed then given
by ω
q . A strictly positive which demand for labor as consumer workers buys is a given unit by of [0, the ω q product ].
The level when of his/her employment utility leads to the product demand θ − we suppose constant returns to scale.
p
q . This The is is demand equals the wage that balances
16 A. Hili et al.
the demand and supply for labor must satisfy,
ωq
=θ−
pq
.
Thus, ω = θq − p.
The profit then writes
π = (p − ω)
(
θ−
pq
)
= (2p − θq)
(
θ−
pq
)
.
First-order condition w.r.t. p gives p = profit gives the profit π =
2
34
θq. Integrating the expression of p in the chooses q = q. θ
8
q
, which is increasing with q. Hence, the monopoly D Result 5.5: In Autarky, workers’ and consumers’ surpluses and
social welfare are given by
(1) (2) (3) The The The workers’ consumers’ social welfare: surplus: surplus: SW(A) S
L
(A) S C
= (A) =
3θ
16
=θ
2 32 2
q
q
.
θ,
32 2
q
,
Proof of Result 5: The workers’ surplus and consumers’ surplus are given, re- spectively, by
S
L
∫
ω(A) (A) =
q(A)
[ω(A) − αq(A)] dα, 0
S
C
∫
θ
p(A) q(A)
[θq(A) − p(A)] dθ.
We substitute the value of q(A), p(A) and ω(A) given in Proposition 2.1 in the expression of S
L
(A) =
(A). The social welfare SW(A) is computed as the sum of S
L
(A) and S
C (A), S
C
(A) and the profit π(A) (given in Proposition 2.1). D
We need Lemma A.1 for Proposition 3.2 to deal with the case of equal qualities for GM scenario. Lemma A.1
(GM): In the GM scenario, in the case q
1
, at the price step there is a continuum of price
equilibria given by
=q
2
̄

is no other equilibrium.
θq ̄ 2

≤ p∗ 1
= p∗ 2
≤
3
θq 4
and there
The Journal of International Trade & Economic Development 17
Proof of Lemma A.1: For the case q
1
=q
2
= q, the firm which fixes the lowest price monopolizes the total
demand. Hence, the demand and profit for Firm i (i = 1, 2), are, respectively, given by
D
i
⎧⎨
⎩
̄θ −
p
(p
i
,p
j
)=
12
θ ̄
iq−
,piq
if p
i
<p
j
;
(1)
π
i
(
), if p
i
=p
j
;
⎧⎪⎪⎨
0, if p
i
>p
j
.
⎪⎪⎩
(
θ ̄
−Pqi
) (p
i
−ω
i
)
, if p
i < (p
i
,p
j
)=
12
(
θ ̄
−
)
, if p
i
p
j
;
(2)
The equilibrium on the labor market gives
ω
i
(p
i
−ω
i
)
Pqi
=p
j
; 0, if p
i
>p
j
.
=
{
(
θq ̄
−p
i
), if p
i
<p
j
;1
(3) 2
This yields
π
i
(
θq ̄
−p
i
), if p
i
=p
j
.
⎧⎪⎪⎨
⎪⎪⎩
(2p
θq) ̄
(
θ ̄
−Pqi
)
, if p
i (p
i
,p
j
)=
i
−
14
(3p
i
−
θq) ̄
(
θ ̄
−
Pqi
)
<p
j
;
, if p
i
=p
j
; 0, if p
i
>p
j
.
• We prove first that all couples (p
1
θq ̄ 2
θq ̄

are Nash Equilibria. Indeed considering for instance Firm 1, for a fixed
5
price p
2
,p
2
), such that
≤p
1
=p
2
≤
3
demand 1 4
(3p
2
−
of so θq)( ̄
its θ ̄
competitor, the profit of Firm 1 for p
1 = no −
pq
2
)p
2
is π
1
(p
2
,p
2
) = > 0. A deviation of Firm 1 to a higher price yields no
price t < p
2
, profit, hence, is not profitable. As for deviations the profit of Firm 1 is given by π
1
(t,p
2
) = (2t −
θq)( ̄
to θ a ̄
lower − t q
). Considered on [0,
̄

as p
2
≤3
5θ ̄
q < θq], ̄ 3
4θ ̄

q. π
1 (., Moreover p
2
) is increasing on [0, 3
4θ
q], thus θq)( ̄
on [0, p
2
[θ ̄
−
p
2qπ
1
(p
2
,p
2 ) = also not profitable.
14
(3p
2
−
θq)( ̄
lim
t→p−
2θ ̄
−
pq
2
) when π 1
(t,p
2
) = (2p
2
−
)≤p
2
≤
3
θq ̄ 5

. Thus, this deviation is

We prove now that there is no other equilibrium.
• Couples (p
1
,p
2 ), such considering Firm 1, for is given by π
1
(p
2
,p
2 ) = that a fixed 1 4
(3p p
1
2 price = − p
θq)( ̄ 2
p
>
2
of θ ̄ 3
θq 5
− ̄ its are competitor, p
q
2
). not Nash Equilibria. Indeed
its profit forp
1
=p
2 When = p
2
− ε , its profit becomes π
1
(p
1
,p
2
) = (2(p
2
− ε) Firm −
θq)( ̄
1 deviates to p
1θ ̄
−
p
2
q −ε
) and
18 A. Hili et al.
when ε converges to zero π
1
−2
−
θq)( ̄
θ ̄
−
pq
2
)>π
1
(p
2
,p
2
) when p
2
(p
,p
2
) = (2p
2 ̄

• > By straightforward 3
θq 5
.
arguments, we prove that the following couples are not Nash Equilibria:
p
1
<p
2
=
̄

yields π
1
 θq 2
,π
1
(p
1
,p
2
) < 0, a deviation of Firm 1 to p
1 ).
=p
2
p
1
(p
1
,)=0>π
1
(p
1
,p
2<p
2
<
p ̄
2
leads to π
1
θq 2
,π
1
(p
1
,p
2
) < 0, a deviation of Firm 1 to p
 1 ).
=p
2
p
1
, θq ̄

(p
1
,p
2
)=0>π
1
(p
1
p
2
θq ̄

p
2
< yields 2
zero < p
2
,π
1
(p
1
,p
2
) < 0, a deviation of Firm 1 to p
1 profit which is profitable.
=
2
<
p
1
θq ̄
θq ̄

p
2
= yields 2
<p
2
,π
1
(p
1
,p
2
) = 0, a deviation of Firm 1 to ) 2
<p
1
<
θq ̄

p
1
leads 2
π
1
(p
1
,p
2
> 0 which is profitable. < p
1
<p
2
,π
2
(p
1
,p
2
) = 0, a deviation of Firm 2 to
̄

to π
2
(p
1
,p
2
) > 0 which is profitable.
θq 2
<p
2
<
D Proof of Proposition 3.2: For the
case q
1
, wages balancing the supply and demand for labor must satisfy
⎧⎪⎪⎨
⎪⎪⎩
<q
2
ω
1
)
,
ω
2q
2
(
p
2
pq
1
=2
−p
1q
2
−q
1
−
1q
)1
,
which is equivalent to
⎧⎪⎨
⎪⎩
=2
(
θ−
pq
2
2
−−p
1q
1
ω
1
=
2q
1
p
2q
2
−q
1
2q
2q
2
,
ω
2
−
pp
2
−−q
1
1
q
2
p
1
.
Profits are then given by
π
1
= 2q
2
θ − 2q
2
−q
1
) = 2(p
1
−ω
1
)
(
p
2
−)
(
3q
2q
2
−×
p
1q
1
−
pq
11
=2
q
2
−−qq
1
1
p
1
−
q
2q
)2
−1
p
q2
1
,
π
2
(
( = 2(p
2
−ω
2
)
θ−
p
 2q
2
p
2
−p
1q
2
−−
pq
11
−p
1
)
q
1
)=2−q
1
×
(
(
3q q θ 2 2
−−−pqq
q
2
21
1−−p2
−
)
q
2q
2
2
p
1−q
1
− 2q
2
θ
p
1q
1
.
The Journal of International Trade & Economic Development 19
Each firm maximizes its profit relative to its own price. Hence, the best response of Firm 1 is given by
p
1
(p
2
)=
q
1
(5q
2 − 2(3q 2
q
1
)p
2
.
Similarly, the best response of Firm 2 is given by
p
2
−q
1
)q
2
(p
1
)=
(5q
2
−q
1
)(p
1 + 2(3q
2
(q
2
−q
1
)θ)
.
The price equilibrium is then given by
⎧⎪⎪⎨
⎪⎪⎩
−q
1
)
p
1
=
p
2
=
(9q 2q
2q
2 θ(5q
1 − θ(5q q
1
)(4q 2
−2q
1 − )2
q
1
)
,
(9q
2
2
−q
1
)(3q
2
−q
1
)
,
yielding the equilibrium profits
⎧⎪⎪⎪⎪⎨
⎪⎪⎪⎪⎩
−q
1
)(4q
2
−q
1
)
π
1
=
2q
1
q
2
θ
2
(5q
2 (9q
2
−q
1
)2(3q
2
−q
1
)
,
π
2
−q
1
)2(4q
2
−q
1
)2
=
8q2 (9q
2
2
θ
2
(3q
2
−q
1
)3
.
In the case q
1
−q
1
)2(4q
2
−q
1
)2
=q
2
dealt with in Lemma A.1, there is a continuum of price equilibria among which we select the couple the limit of the
equilibrium prices obtained in p∗ the 1
= case p∗ 2
q=
1
<2
θq 3 ̄

q
2 as , as it q
corresponds 1
to converges to q
2
.
The profit for each firm i at price equilibrium is given by
π
i
⎧⎪⎪⎪⎨
⎪⎪⎪⎩
2q
i
q
j
θ
2
(5q
j
−q
i
)2(3q
j
−q
i
)
=
(9q 8q2
i
θj
2 − (3q q
ii
)2(4q − q
j
j
−q
i
)2
if q
i ≤ )3
q
j
,
(4)
(9q
i
−q
j
)2(4q
i
−q
j
)2
if q
i
>q
j
.
We calculate equilibrium qualities by maximizing π
i
w.r.t q
i
. Profit π
i
is a piecewise function continuously
increasing in q
i
. Thus, at equilibrium both firms choose q
i
= q. D
Discussion of the selection rule: We have so far chosen the selection rule which seemed to be the most natural one
leading to continuous prices, as prices are the limits of equilibrium prices
20 A. Hili et al.
obtained in the case q
i
<qj
when the difference between qualities converges to zero.
Suppose now that we choose any possible selection rule. For q
i
=q
j
= q, consider any price equilibrium
θq 2
≤p
1
=p
2
=s≤
3θq 4
the profit of Firm i is
given by π
i (s) being the profit = obtained 1
4
(3s − with θq)(θ our − selection q
s
). We easily prove that π
i
(s) < rule.
θ
2
9
q
, the latter
This implies that the considered selection rule Pareto-dominates all the other possible selection rules, which
constitutes another reason to choose it.
For Proposition 3.2, we need Lemma A.2 to deal with the case of equal qualities in CLM’s scenario.
Lemma A.2 (CLM): In the CLM scenario, only the couple (p
1
=
5
θq ̄ 7

,p
2
=
5
θq ̄ 7

in the case q
1 = ) is an equilibrium.
q
2
, at the price step
Proof of Lemma A.2: For the case q
1
=q
2
= q, workers who accept to work are employed by one of the two firms
and both labor demand for Firms 1 and 2 are satisfied. Hence, at fixed prices there is only one possible equilibrium
in terms of wages ω
i
=ω
j
= ω, such as
2ω q
=
θ ̄
−
p
iq
+
θ ̄
−
pq
j
,
which yield ∀p
i
θ ̄
−
θq ̄
−p
i
,p
j
>0π
i
(p
i
,p
j
) = (p
i
−ω
i
)( − p
j
))(
θ ̄
−
p
p
iq
) = (p
i
−12
(2
Each firm i
maximizes q
).
its profit w.r.t its price thus the best response of Firm i is given by p
i
̄

p
1
=p
2
=
5
θq ̄ 7

.=
5
θq−p 6
j
(i, j = 1, 2) which leads to the equilibrium prices D
Proof of Proposition 3.3: For q
1
<q
2
, wages that balance the supply and demand for labor satisfy the following
system:
⎧⎪⎪⎨
⎪⎪⎩
θ−
pq
22
(
ω
2
θ−
=2
(
ωq
21
−−ω
1q
1
)
,
q
1
)
,
which is equivalent to
⎧⎪⎨
⎪⎩
p
1q
1
=2
−
ωq
2
2
−ω
1−q
1
ω
q
ω
1
2
= = θq θ
(q 1
1−+2p
1
/2 −
2q 1
2
p
2
,q
2
)
−p
1
/2 − p
2
/2.
The Journal of International Trade & Economic Development 21
Replacing p
iq
i
wages by their preceding expressions in the profits: π
i ), then writing first-order conditions = (p i
−ω
i
)(θ − w.r.t. prices leads to the equilibrium price,
⎧⎪⎪⎨
⎪⎪⎩
p
1
=
θ(26q
2 − 36q 2
q
1
)q
1
,
p
2
− = θ(24q
2
+q
1
36q
2
q
1
)q
2
.
Profits at price equilibrium are given by
⎧⎪⎪⎪⎨
⎪⎪⎪⎩
−q
1
π
1
=
2
q
1
q2
π
2
=
(36q 6θ
150θ
(36q 2
q
2
2
(6q − 2
−q2
1
2 − )2 q
1
,
)2 q
1
)2
.
With Lemma the price equilibrium A2, we have proved that the in the case q
1
=q
2
, which couple (p
 1 corresponds =
to 5
θq 7 ̄

the ,p
limit 2 =
̄5

θq of 7
) is the equilibrium prices obtained in the case q
1
<q
2
as q
1
converges to q
2
. For the quality step, we prove that each profit π
i
is increasing in q
i
, thus, both firms choose at equilibrium,
quality q. D
Proof of Proposition 3.4: Suppose that q
1
<q
2
. In each country, each worker has the choice between three options:
Firm 1, Firm 2 or unemployment. The marginal worker between the two firms is given by
α
1,2
=
ω
2−q2
ω
1
.
The marginal worker indifferent between working in Firm 1 and unemployment is given by
α
1
−q
1
=
ωq
11
.
If both firms are active, we have necessarily
0<α
1,2
<α
1
< α.
The demands for labor are, respectively, given by
D
1
=α
1
−α
1,2
,
22 A. Hili et al.
and
D
2
=α
1,2
.
Wages that balance the demand and supply of labor must then satisfy,
⎧⎪⎨
⎪⎩
p
2
−p
1q
2
p
1q
1
ω
1q
1
ω
2−−q
1
−
=
−
ω
1q
2
−q
1
,
θ−
pq
2
2
−p
1
ω
2−−q
1
=
ω
1q
2
−q
1
,
which is equivalent to
{
ω
1
= θq
1
−p
1
,ω
2
= θq
2
−p
2
.
Profits are given by
⎧⎪⎪⎨
⎪⎪⎩
(
p
2
 )π
1
= 2(p
1
−ω
1
)
(
q
2
,
π
2
− − = 2(p
2
−ω
2
)
θ−
p
pq2
11−−p
1pq
)11
q
2
.
Factor 2 in profits’ expressions comes from the fact that each firm is present in two identical markets. First-order
conditions yield after computations the equi- librium prices
⎧⎪⎪⎨
⎪⎪⎩
−q
1
p
1
=
θq
1
(5q 8q
2
2
− 2q
1
)
,
p
2
− = 3θq
2
(2q 8q
2
2
2q − 1
q
1
)
.
Hence, wages at price equilibrium are given by
⎧⎪⎪⎨
⎪⎪⎩
− 2q
1
ω
1
=
3θq 8q
2
1
q
2
,
ω
2
− = θq
2
(2q 8q
2
2q
2
+ 1 − 2q
q
1
)
.1
The Journal of International Trade & Economic Development 23
Profits at price equilibrium are then given by
⎧⎪⎪⎪⎨
⎪⎪⎪⎩
π
1
=
θ
2
q
1
q
2
(q
2−π
2
=
q
1
)
2θ
2(4q
(4q
2
q2 2
2
(q 2 − − 2 q − q
1
)2 1
q )2
1
)
.
,
For the quality step, we prove that ∂π ∂q
11
has the same sign as 4q2 2
− 7q
1
q
2
, which implies that π
1 reaches its maximal value always increasing in q
2
, thus is maximal at q
2
= q. at q
1
=47
q
2
; and that
∂π ∂q
22
is D Proof of Corollary 3.1: For the global world, the workers’ and consumers’ sur- pluses are, respectively, given
by
S
L
2∑
∫
ω
i
i=1
(GM) (GM) =
q
i
(GM)
[ω
i
(GM) − αq
i
 (GM)] d α 0
S
C
(∫ (GM) = 2
pq
22
(GM)−p (GM)−q
11
(GM) (GM)
p
1
[θq
1
(GM) − p
1
(GM)] dθ
+
(GM) ∫
q
1
(GM)
θ ̄

)
pq
22
(GM)−p (GM)−q
11
(GM) (GM)
[θq
2
(GM) − p
2
(GM)] dθ
At equilibrium, we substitute the values of q
i
(GM), p
i
(GM) and ω
i
(GM) given in Proposition 3.2 in S
L
(GM) and S
C
(GM). The social welfare for the global world SW(GM) is given by: SW(GM) =
S
L
(GM) + S
C
(GM) + 2π(GM), where π(GM) is given in Proposition 3.2. We
compare for the global world the equilibrium outcome of Autarky and GM. All values are given in Table B1. D
Proof of Corollary 3.2: For the global world, the workers’ and consumers’ sur- pluses are given, respectively, by
S
L
(∫ (CLM) = 2
ωq
22
(CLM)−ω (CLM)−q
11
(CLM) (CLM)
[ω
2
(CLM) − αq
2
(CLM)] dα 0
+
)
S
C
∫
q
1ω
(CLM) 1
(M)
ωq
22
(CLM)−ω (CLM)−q
11
(CLM) (CLM)
[ω
1
(CLM) − αq
1
(CLM)]dα
(CLM) =
2∑
∫
θ
i=1
p
iq
(CLM) i
(M)
[θq
i
(CLM) − p
i
(CLM)] dθ
24 A. Hili et al.
At equilibrium, we substitute the values of q i
(CLM), p i
(CLM) and ω
i
(CLM) given in Proposition 3.3 in S
L
(CLM) and S
C
(CLM). Hence, the social welfare for the global world is: SW(CLM) = S
L
(CLM) + S
C
(CLM) + 2π(CLM), where π(CLM) is given in Proposition 3.3.
We compare for the global world the equilib- rium outcome of Autarky and CLM. All values are given in Table B1.
D Proof of Corollary 3.4: For the global world, the workers’ and consumers’ sur- pluses are given, respectively, by
S
L
(
∫
ω
2
)
S
C
(FI) = 2
q
2
(FI)−ω (FI)−q
1
(FI)
∫
ωq
11
(FI)
0
1
(FI)
[ω
2
(FI)−αq
2
(FI)] dα+
ω
2
(FI)
(FI)−ω
[ω
1
(FI) − αq
1
(FI)] dα (
∫
p
2
q
2
1
(FI)
)
At equilibrium, we substitute the value of q
i (FI) = 2
pq
11
q
(FI) (FI) 2
(FI)−p (FI)−q
11
(FI) (FI)
[θq
1
(FI)−p
1
(FI)] d θ+
∫
(FI)−q
1
(FI) θ ̄
pq
22
(FI)−p (FI)−q
11
(FI) (FI)
[θq
2
(FI) − p
2
(FI)] dθ
(FI), p
i
(FI) and ω
i
(FI) given in Proposition 3.4 in S
L
(FI) and S
C
(FI). The social welfare for the global world is SW(FI) = S
L
∑ i given in (FI) + S
C (FI) Proposition 3.4. We +
compare 2
i=1
π
for i (FI), the where global π i world is the equilibrium of Firm the equilibrium out- come of Autarky and FI. All
values are given in Table B1. D
Appendix B
Table B1. Equilibrium for the global world in the four scenarii.
Scenario Equilibrium A GM CLM FI
Qualities q
1
=q
2 = = Prices p
1
̄q θ ̄
̄q q
1=p
1
q
2
= ̄q θ ̄
̄q q
1=p
1
q
2
= ̄q θ ̄
̄q q
1p
1
47
̄q q
θ ̄
̄qp
2
2
= ̄q
θ ̄
̄q Wages ω
1
=p
2
=34
θ ̄
̄q = p
2=ω
1
23
θ ̄
̄q = p
2=ω
1
57
θ ̄
̄q = ω
1
9 28
θ ̄
̄qω
2
=58
θ ̄
̄q Consumers’ surplus S
C
=ω
2 θ2 ̄
= ̄q 1 4
=ω
2
=13
=ω
2
=27
=14
=38
Producers’ surplus S
P
1 16
̄
19
θ2 ̄
̄q 4 49
θ2 ̄
̄q 7 48
θ2 ̄
̄q
Workers’ surplus S
L
14
θ2 ̄
̄q 2 9
θ2 ̄
̄q 12 49
θ2 ̄
̄q 1 6
θ2 ̄
̄q Employment L 1
θ2 ̄q 1 9
θ2 ̄
̄q 4 49
θ2 ̄
̄q 77 768
̄ Total surplus SW 16 1 2
̄
θ2 ̄q θ 3 8
θ2 ̄
̄q 4 9
2 3 θ2 ̄ θ ̄
̄q 20 49
47
θ2 ̄ θ ̄
̄q 317 768
78
θ2 θ ̄ ̄
̄q
Note: In the autarkic case we compute for the global world the consumers’, workers’, producers’ and social planners’ surpluses
by multiplying by two the equilibrium values given in Result 5.
The Journal of International Trade & Economic Development 25
Table B2. Classification of the four scenarii in terms of competition on the product and labor markets.
Labor market Product market
C ̄
C
C ̄
A CLM C GM FI
C: ̄
no competition. C: competition. A: Autarky. GM: Goods’ Mobility. CLM: Common Labor Market. FI: Foreign Investment.