Through trade theory, the home market effect is derived from models with returns to scale and transportation costs.
[5] Krugman's model yields two related predictions regarding the effects of market size asymmetries on the geographic distribution of industry activity.
Thus, a further development in the literature has been to examine the robustness of the home market effects (HMEs) under different modeling assumptions.
In the empirical literature, Head et al. (2001)[7] show that, from a panel of U.S. and Canada, an increasing returns model where varieties linking to firms predicts HMEs.
On theoretical side, Davis (1998)[11] shows that if both homogeneous and differentiated goods have identical transport costs, then the HMEs disappear.