A Communication Based Model of Global Production Fragmentation

A model is developed in which communications costs determine the geographic extent of production fragmentation. The focus is on production and trade of intermediate services and components. On the production side of the model there are returns to increased specialization within plants but fixed costs which are component specific. 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. An important distinction is made between international equilibrium and global equilibrium. Fragmentation occurs as a consequence result of reductions in communications costs. The model has multiple equilibria with different welfare and comparative static properties.