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Sub-national Differentiation and the Role of the Firm in Optimal International Pricing

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  • Edward J. Balistreri
  • James R. Markusen

Abstract

We illuminate the relationship between optimal firm pricing and optimal trade policy by exploring a generalized model that accommodates product differentiation at both the national and sub-national (firm) levels. We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their terms of trade through trade distortions, because firms play an important preemptive role in optimally pricing unique varieties. We contrast this with standard applications of perfect-competition Armington models, which exhibit high optimal tariffs--even for relatively small countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13130.

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Date of creation: May 2007
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Publication status: published as Balistreri, Edward J. & Markusen, James R., 2009. "Sub-national differentiation and the role of the firm in optimal international pricing," Economic Modelling, Elsevier, vol. 26(1), pages 47-62, January.
Handle: RePEc:nbr:nberwo:13130

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  1. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 1992. "A North American Free Trade Agreement: Analytical Issues and a Computational Assessment," The World Economy, Wiley Blackwell, vol. 15(1), pages 11-30, 01.
  2. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  3. Markusen, James R. & Melvin, James R. & Maskus, Keith E. & Kaempfer, William, 1995. "International trade: theory and evidence," MPRA Paper 21989, University Library of Munich, Germany.
  4. Markusen, James R., 1990. "Derationalizing tariffs with specialized intermediate inputs and differentiated final goods," Journal of International Economics, Elsevier, Elsevier, vol. 28(3-4), pages 375-383, May.
  5. Markusen, James R & Wigle, Randall M, 1989. "Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(2), pages 368-86, April.
  6. Drusilla K. Brown & Kozo Kiyota & Robert M. Stern, 2005. "Computational Analysis of the U.S FTAs with Central America, Australia, And Morocco," Working Papers, Research Seminar in International Economics, University of Michigan 527, Research Seminar in International Economics, University of Michigan.
  7. Rutherford, Thomas F, 1999. "Applied General Equilibrium Modeling with MPSGE as a GAMS Subsystem: An Overview of the Modeling Framework and Syntax," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 14(1-2), pages 1-46, October.
  8. Brown, Drusilla K., 1987. "Tariffs, the terms of trade, and national product differentiation," Journal of Policy Modeling, Elsevier, Elsevier, vol. 9(3), pages 503-526.
  9. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1029-46, December.
  10. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, Elsevier, vol. 22(1-2), pages 79-102, February.
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Cited by:
  1. World Bank, 2012. "Assessment of Costs and Benefits of the Customs Union for Kazakhstan," World Bank Other Operational Studies 2722, The World Bank.
  2. Jung, Benjamin & Felbermayr, Gabriel & Larch, Mario, 2013. "Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade," Munich Reprints in Economics, University of Munich, Department of Economics 19542, University of Munich, Department of Economics.
  3. Russell H. Hillberry & Edward J. Balistreri & Thomas F. Rutherford, 2007. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c012_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Balistreri, Edward J. & Rutherford, Thomas F., 2013. "Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms," Handbook of Computable General Equilibrium Modeling, Elsevier, Elsevier.
  5. Jensen, Jesper & Tarr, David G., 2011. "Deep trade policy options for Armenia: The importance of trade facilitation, services and standards liberalization," Economics Discussion Papers 2011-33, Kiel Institute for the World Economy.
  6. Jensen, Jesper & Tarr, David G., 2010. "Regional trade policy options for Tanzania : the importance of services commitments," Policy Research Working Paper Series 5481, The World Bank.
  7. World Bank, 2012. "Kazakhstan : Assessment of Costs and Benefits of the Customs," World Bank Other Operational Studies 12299, The World Bank.
  8. Vásquez Cordano, Arturo L. & Balistreri, Edward J., 2010. "The marginal cost of public funds of mineral and energy taxes in Peru," Resources Policy, Elsevier, Elsevier, vol. 35(4), pages 257-264, December.
  9. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2012. "Tariffs and welfare in new trade theory models," University of Tuebingen Working Papers in Economics and Finance 41, University of Tuebingen, Faculty of Economics and Social Sciences.

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