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A simple model of quality heterogeneity and international trade

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  • Dinopoulos, Elias
  • Unel, Bulent

Abstract

This paper develops a trade model with firm-specific quality heterogeneity in markets where firms face the threat of imitation and engage in limit-pricing strategies. Firms producing high-quality (high-price) products export, whereas firms producing lower-quality (lower-price) products serve the domestic market. Trade liberalization raises the average domestic markup and increases the number of products consumed in each country. However, the impact of trade liberalization on the average export markup depends on the nature of liberalization. Although the presence of markups renders the laissez-faire equilibrium suboptimal, trade liberalization increases national and global welfare.

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  • Dinopoulos, Elias & Unel, Bulent, 2013. "A simple model of quality heterogeneity and international trade," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 68-83.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:68-83
    DOI: 10.1016/j.jedc.2012.07.007
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    Cited by:

    1. Antoine Gervais, 2015. "Product quality, firm heterogeneity and trade liberalization," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(4), pages 523-541, June.
    2. Yongjin Wang & Laixun Zhao, 2013. "Saving Good Jobs under Global Competition by Rewarding Quality and Efforts," Discussion Paper Series DP2013-17, Research Institute for Economics & Business Administration, Kobe University, revised May 2013.
    3. Dinopoulos, Elias & Unel, Bulent, 2011. "Quality heterogeneity and global economic growth," European Economic Review, Elsevier, vol. 55(5), pages 595-612, June.
    4. Mallick, Sushanta & Marques, Helena, 2016. "Does quality differentiation matter in exporters' pricing behaviour? Comparing China and India," China Economic Review, Elsevier, vol. 40(C), pages 71-90.
    5. Ako Viou Bahun-Wilson, 2022. "On the Role of Product Quality in Product Reallocation and Macroeconomic Dynamics," Cahiers de recherche 22-01, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    6. R. S.-H. Lee & M. Pak, 2018. "Pro-competitive effects of globalisation on prices, productivity and markups: Evidence in the Euro Area," Documents de Travail de l'Insee - INSEE Working Papers g2018-06, Institut National de la Statistique et des Etudes Economiques.
    7. Bulent Unel, 2013. "The Interaction Between Technology Adoption and Trade When Firms are Heterogeneous," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 797-808, September.
    8. Kishi, Keiichi & Okada, Keisuke, 2018. "Trade Liberalization, Technology Diffusion, and Productivity," MPRA Paper 88597, University Library of Munich, Germany.
    9. Levy, Ting & Dinopoulos, Elias, 2016. "Global environmental standards with heterogeneous polluters," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 482-498.
    10. Steven Bond-Smith & Philip McCann & Les Oxley, 2018. "A regional model of endogenous growth without scale assumptions," Spatial Economic Analysis, Taylor & Francis Journals, vol. 13(1), pages 5-35, January.
    11. Kishi, Keiichi & Okada, Keisuke, 2021. "The impact of trade liberalization on productivity distribution under the presence of technology diffusion and innovation," Journal of International Economics, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Firm heterogeneity; Monopolistic competition; Product quality; Trade costs; Trade liberalization;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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