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Market Penetration Costs and the New Consumers Margin in International Trade

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  • Costas Arkolakis

Abstract

I develop a new theory of marketing costs and introduce it into a model of trade with product differentiation and firm productivity heterogeneity. In this model, a firm enters a market if it makes profits by reaching a single consumer there and pays an increasing marginal cost to access additional consumers. This market penetration cost introduces an extensive margin of new consumers in firms' sales. I calibrate the key parameters of the model to match data on French firms from Eaton, Kortum and Kramarz, in particular the higher sales in France of firms that choose to export to more destinations. The model predicts that most firms do not export, and that a large proportion of firms that export in particular markets do so in small amounts. These predictions are in line with the French data, but together create a puzzle for models with a fixed cost of exporting, such as those of Melitz and Chaney. Looking at the comparative statics of trade liberalization, I find that the model predicts large increases in trade in goods with positive but little previous trade, in line with Kehoe and Ruhl. The model implies that these increases can contribute to new trade significantly more than the corresponding increases due to new exporters.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14214.

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Date of creation: Aug 2008
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Publication status: published as Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
Handle: RePEc:nbr:nberwo:14214

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  1. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 865-915, August.
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  7. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," NBER Working Papers 11393, National Bureau of Economic Research, Inc.
  8. Costas Arkolakis & Marc-Andreas Muendler, 2010. "The Extensive Margin of Exporting Products: A Firm-level Analysis," NBER Working Papers 16641, National Bureau of Economic Research, Inc.
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  27. Timothy J. Kehoe, 2003. "An evaluation of the performance of applied general equilibrium models of the impact of NAFTA," Staff Report, Federal Reserve Bank of Minneapolis 320, Federal Reserve Bank of Minneapolis.
  28. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, Econometric Society, vol. 70(5), pages 1741-1779, September.
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