A Simple Model of Quality Heterogeneity and International Trade

Bulent Unel (bunel@lsu.edu) and Elias Dinopoulos (dinopoe@ufl.edu)
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Elias Dinopoulos: https://people.clas.ufl.edu/dinopoe/

Departmental Working Papers from Department of Economics, Louisiana State University

Abstract: This paper develops a trade model with firm-specifc quality heterogeneity, limit pricing, and an endogenous distribution of markups. Exposure to trade induces only the firms producing high-quality (high-price) products to enter the export markets, whereas firms producing low-quality (low-price) products serve the domestic market in accor- dance to the Alchian and Allen (1964) conjecture. Trade liberalization intensifies the competition; causes firms producing low-quality products to exit the market; increases the number of products consumed in each country; and generates quality upgrading that results in higher average domestic and export markups. The welfare effect of trade liberalization is ambiguous because the laissez-faire markups can be greater or lower than the socially optimal markups.

Date: 2009-04
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Citations: View citations in EconPapers (2)

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Journal Article: A simple model of quality heterogeneity and international trade (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:lsu:lsuwpp:2009-04

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