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A Simple Model of Quality Heterogeneity and International Trade

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  • Bulent Unel

    ()

  • Elias Dinopoulos

    ()

Abstract

This paper develops a trade model with firm-specifc quality heterogeneity, limit pricing, and an endogenous distribution of markups. Exposure to trade induces only the firms producing high-quality (high-price) products to enter the export markets, whereas firms producing low-quality (low-price) products serve the domestic market in accor- dance to the Alchian and Allen (1964) conjecture. Trade liberalization intensifies the competition; causes firms producing low-quality products to exit the market; increases the number of products consumed in each country; and generates quality upgrading that results in higher average domestic and export markups. The welfare effect of trade liberalization is ambiguous because the laissez-faire markups can be greater or lower than the socially optimal markups.

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Bibliographic Info

Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2009-04.

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Handle: RePEc:lsu:lsuwpp:2009-04

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Cited by:
  1. 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.
  2. Bulent Unel, . "The Interaction Between Technology Adoption and Trade When Firms are Heterogeneous," Departmental Working Papers 2010-03, Department of Economics, Louisiana State University.
  3. Dinopoulos, Elias & Unel, Bulent, 2011. "Quality heterogeneity and global economic growth," European Economic Review, Elsevier, vol. 55(5), pages 595-612, June.

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