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The Quality-Income effect and the selection of location

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  • BACCHIEGA, Emanuele
  • MINNITI, Antonio

Abstract

We analyze a location-choice model with two vertically differentiated firms and two regions with different consumer income. We find that the high-quality producer settles in the poor region and the low-quality one in the rich region when income disparities are sufficiently high and goods are differentiated enough. This apparently counter-intuitive result is not determined by technology or size issues; rather, it relies on the relationship between regional income disparities and product quality, which we call the "Quality-Income effect."

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -2082.

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Handle: RePEc:cor:louvrp:-2082

Note: In : Journal of Urban Economics, 65(2), 209-215, 2009
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  1. Bonanno, Giacomo & Haworth, Barry, 1998. "Intensity of competition and the choice between product and process innovation," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 495-510, July.
  2. Juan Carlos Hallak & Peter K. Schott, 2011. "Estimating Cross-Country Differences in Product Quality," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 417-474.
  3. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
  4. Laussel, Didier & Paul, Thierry, 2007. "Trade and the location of industries: Some new results," Journal of International Economics, Elsevier, vol. 71(1), pages 148-166, March.
  5. BELLEFLAMME, Paul & PICARD, Pierre & THISSE, Jacques-François, . "An economic theory of regional clusters," CORE Discussion Papers RP -1464, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
  7. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  8. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Hasan Faruq, 2006. "New Evidence on Product Quality and Trade," Caepr Working Papers 2006-019, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  10. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  12. Philip McCann, 2005. "Transport costs and new economic geography," Journal of Economic Geography, Oxford University Press, vol. 5(3), pages 305-318, June.
  13. Ashoka Mody & Deniz Igan & Stefania Fabrizio, 2007. "The Dynamics of Product Quality and International Competitiveness," IMF Working Papers 07/97, International Monetary Fund.
  14. Wauthy, X., 1994. "Quality Choice in Models of Vertical Differentiation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1994033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  15. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
  16. John Sutton, 2007. "Quality, Trade and the Moving Window: The Globalisation Process," Economic Journal, Royal Economic Society, vol. 117(524), pages F469-F498, November.
  17. Joel Waldfogel, 1999. "Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated Product Markets," NBER Working Papers 7391, National Bureau of Economic Research, Inc.
  18. Lisa George & Joel Waldfogel, 2003. "Who Affects Whom in Daily Newspaper Markets?," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 765-784, August.
  19. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
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