We develop a framework for studying trade in horizontally and vertically differentiated products. In our model, consumers have heterogeneous incomes and heterogeneous tastes. They purchase a homogeneous good as well as making a discrete choice of quality and brand of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher-quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade---which is driven primarily by demand factors---derives from "home market effects" in the presence of transport costs. When these costs are sufficiently small, goods of a given quality are produced in a single country. The model provides a tractable framework for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
15329.
Length: Date of creation: Sep 2009 Date of revision: Handle: RePEc:nbr:nberwo:15329
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Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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[Downloadable!] (restricted)
Devashish Mitra & Vitor Trindade, 2005.
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Devashish Mitra & Vitor Trindade, 2003.
"Inequality and Trade,"
NBER Working Papers
10087, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Mark Bils & Peter J. Klenow, 2001.
"Quantifying Quality Growth,"
American Economic Review,
American Economic Association, vol. 91(4), pages 1006-1030, September.
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