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Shipping the Good Horses Out

Jean Eid (), Travis Ng () and Terence Tai Leung Chong ()
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Jean Eid: Department of Economics, School of Business and Economics, Wilfrid Laurier University, 75 University Avenue W, Waterloo, Ontario N2L 3C5, Canada;

Southern Economic Journal, 2013, vol. 80, issue 2, 540-561

Abstract: The Alchian-Allen (1964) effect states that when a fixed per-unit cost is added to two substitutes, the more expensive (higher quality) one becomes relatively cheaper, and, thus, its consumption will increase. When applied to trade in vertically-differentiated goods, the importing regions demand relatively more high-quality goods. We examine how this result changes when the importing region is also endowed with the goods. We use a vertically-differentiated goods model with heterogeneous consumers in which prices are endogenously determined. We show that the importing regions with an endowment have a stronger Alchian-Allen effect than the regions that are not endowed. We use the auction data of Australian thoroughbred yearlings to empirically test our model and find consistent empirical patterns.

JEL-codes: D40 D44 F19 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:sej:ancoec:v:80:2:y:2013:p:540-561