The multi-market firm, transportation costs, and the separation of the output and allocation decisions

Abstract

Despite the documented importance of transport costs for firms with sales in geographically separated markets, theoretical analyses typically ignore such costs. This paper analyzes the effects of transport costs for a risk averse, competitive firm selling a single good in a domestic (certain) and a foreign (uncertain) market, and shows that these effects are asymmetric. The effects on total output and the inter-market allocation of output depend on the behavior of marginal domestic transport costs, but are largely independent of the form of the foreign transport cost function. Moreover, regardless of the latter, if marginal transport costs in the domestic market are constant, the firm's total output is independent of its attitude towards risk and the parameters of the risky market. This suggests that the firm's activity can be insulated from foreign uncertainties by government policies that focus on the shape of the domestic transportation cost function. Copyright 2003, Oxford University Press.