A Model of Trade Flows in Differentiated Goods

In modeling trade competition for final products within a sector, the assumption of product homogeneity is often quite unrealistic. Even where the demand for different versions of the product can be attributed to relatively independent submarkets, considerable heterogeneity may still exist within each submarket. For each submarket, such as that for a medium-priced family car, it is assumed that more product heterogeneity exists between countries or regions than within them. Heterogeneity between regions is related to the existence of importers, acting as intermediate agents, who make trade-offs between cif import prices of goods and the willingness-to-pay by consumers. Aggregate spatial supply and demand functions based on plausible distributional assumptions are presented and estimated using a unified theoretical basis for each regional grouping of producers, importers, and consumers. Conditions for simultaneous equilibrium for these three sets of agents are established, and illustrated via a small numerical example.