Fredrik Gallo

In the coming years, I will be involved in two research projects. One focuses on the circumstances under which firms choose to segment markets; the other is a larger inter-disciplinary research project focusing on various aspects of corporate taxation.

To Segment or Not to Segment Markets? The Profitability of Market Segmentation for an International Oligopoly

Whether firms segment or integrate markets has in international trade theory mainly been a given assumption. Recent research makes the actual degree of market segmentation an explicit decision of the firm. The basic idea is that as a monopoly makes greater profits when it segments geographical markets, it has an economic incentive to invest to make cross-border arbitrage more expensive, which gives the firm more leeway to segment markets. Furthermore, sunk costs of market segmentation increases the expected profitability of market segmentation the more volatile the exchange rate between the markets is. In this research project we extend the analysis to a Cournot duopoly and show that the ranking of profits may be reversed. Indeed, when integrating the markets the two firms may earn a higher profit compared to when they segment them. The reason is that consumer arbitrage is a "disciplining device" that induces the firms to behave more monopoly-like in one market, helping them to commit to the cartel solution there. While a monopolist would have an incentive to make it more difficult for consumers to resale goods, thus making it easier to segment markets and increase its profits, such an incentive may be absent for a Cournot duopoly.

Tax Policy and Economic Integration

This research project takes The New Economic Geography (NEG) as its point of departure. In that literature, the main theme is that increased economic integration has far-reaching consequences for the location of production. Industries can become highly concentrated geographically as firms, in the presence of trade costs, want to locate close to important suppliers of inputs and consumers. These location advantages are self-reinforcing – as one firm relocates to another country or region it raises the local supply of inputs and spending power, thereby increasing the attractiveness of that location for other firms as well. Furthermore, the NEG shows that countries where industries choose to locate gain some autonomy with respect to policy-setting as agglomeration benefits may induce firms to stay even if policies detrimental to the firms' interests (e.g. more restrictive tax policies) are implemented. For smaller countries, however, the opposite is likely to be true. Already at a disadvantage in terms of market size, such policies may further discourage firms from locating there. We will draw on the NEG to analyse if more restrictive national tax policies in small countries will induce capital and firm flight to "tax havens" or larger markets, and how the tax structure affects location choices.