Buyer Investment, Product Variety, and Intrafirm Trade

Robert C. Feenstra () and Yongmin Chen ()

No 11752, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies a simple model of buyer investment and its effect on the variety and vertical structure of international trade. A distinction is made between two types of buyer investment: "flexible" and "specific." Their interactions with the entry and pricing incentives of suppliers are analyzed. It is shown that (i) there can be multiple equilibria in the variety of products traded, and (ii) less product variety is associated with more intrafirm trade. The possibility of multiple equilibria is consistent with the observation that some similar economies, such as Taiwan and South Korea, differ substantially in their export varieties to the U.S. A formal empirical analysis confirms the negative correlation between product variety and intrafirm trade.

JEL-codes: F1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-int
Date: 2005-11
Note: ITI
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