A Welfare Enhancing Production Subsidy When Consumers Have Economies of Scale in Shopping

A Welfare Enhancing Production Subsidy When Consumers Have Economies of Scale in Shopping

There has been considerable theoretical development of imperfect competition in trade models. Little attention has been directed to imperfections in consumption, however This paper contributes to this issue by considering consumers that incur shopping costs, with economies of scale in shopping, in the purchase of a horizontal product line. In a free trade equilibrium in which a foreign firm produces the entire product line and the home firm produces a p roper subset of it, there is a welfare enhancing opportunity for the home government to subsidize production. This is consistent with the activist recommendation of profit shifting models.