Trade and Communication Costs

Two models in which communication costs are a cost to trade are investigated. One model looks at the role of communication in determining the firms' geographic extent in the use of local factor services. Communication costs are modelled as a quasi-public-good network in which communication services are provided by an average cost-pricing monopolist. The network technology is subject to increasing returns, congestion effects, and network externalities. The second model focuses on communication for the purposes of international trade in goods with similar assumptions on the technology of communication as in the first model. In this model an important distinction is made between international equilibrium and global equilibrium. In both models the impact of reductions in communication costs on the market extent of firms, trade volumes, and productivity are examined. The models have generic multiple equilibria with quite different welfare and comparative static properties.