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Intransparent Markets and Intra-Industry Trade

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  • Gormsen, Christian

    ()
    (Department of Economics, Aarhus School of Business)

Abstract

Buyers are typically unaware of the full set of offers when making a purchase. This paper examines how international trade interacts with this problem of market intransparency. Sellers must communicate their offers through costly advertising, but cannot reach all buyers. Consequently, no market clearing price exists, and sellers randomize over an equilibrium price distribution. Letting sellers advertise their offers abroad leads to international trade, which would not take place under complete information. Buyers then receive more offers, leading to lower prices and welfare gains. Sellers in the model are identical, but appear heterogeneous due to their price randomization. In larger and more open economies, prices and markups will be lower, and exports are primarily realized by sellers who charge low prices. These predictions are similar to those of trade models where firm heterogeneity is assumed exogenously.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 09-20.

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Length: 28 pages
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:hhs:aareco:2009_020

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Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 486396
Fax: +45 8615 5175
Web page: http://www.asb.dk/departments/nat.aspx
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Keywords: advertising; intra-industry trade; firm heterogeneity; price dispersion;

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References

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Cited by:
  1. Daniel X. Nguyen, 2010. "Demand Uncertainty: Exporting Delays and Exporting Failures," Discussion Papers 10-17, University of Copenhagen. Department of Economics.
  2. Nguyen, Daniel X., 2012. "Demand uncertainty: Exporting delays and exporting failures," Journal of International Economics, Elsevier, vol. 86(2), pages 336-344.

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