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Trade, economic geography and the choice of product quality

  • PICARD, Pierre M.

    ()

    (CREA, University of Luxembourg; Université catholique de Louvain, CORE, Belgium)

The present paper studies the effect of the choice of product quality on trade and location of firms. We discuss a model where consumers have preferences for the quality of a set of differentiated varieties. Firms do not only develop and sell manufacturing varieties in a monopolistic competitive market but also determine the quality level of their varieties by investing in research and development. We explore the price and quality equilibrium properties when firms are immobile. We then consider a footloose capital model where capital is allocated to the manufacturing firms in the region offering the highest return. We show that the larger region produces varieties of higher quality and that the quality gap increases with larger asymmetries in region sizes and with larger trade costs. Finally, the home market effect is mitigated when firms choose their product quality.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013039.

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Date of creation: 23 Jul 2013
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Handle: RePEc:cor:louvco:2013039
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  1. Kevin M. Murphy & Andrei Shleifer, 1991. "Quality and Trade," NBER Working Papers 3622, National Bureau of Economic Research, Inc.
  2. Toshihiro Okubo & Pierre M. Picard & Jacques-François Thisse, 2008. "The spatial selection of heterogeneous firms," Discussion Paper Series 229, Research Institute for Economics & Business Administration, Kobe University.
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  8. PICARD, Pierre M. & OKUBO, Toshihiro, . "Firms' locations under demand heterogeneity," CORE Discussion Papers RP 2459, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. De Loecker, Jan & Goldberg, Pinelopi Koujianou & Khandelwal, Amit & Pavcnik, Nina, 2012. "Prices, Markups and Trade Reform," CEPR Discussion Papers 8900, C.E.P.R. Discussion Papers.
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  12. Falvey, Rodney E., 1981. "Commercial policy and intra-industry trade," Journal of International Economics, Elsevier, vol. 11(4), pages 495-511, November.
  13. Richard Baldwin, 2005. "Heterogeneous Firms and Trade: Testable and Untestable Properties of the Melitz Model," NBER Working Papers 11471, National Bureau of Economic Research, Inc.
  14. Okubo, Toshihiro & Picard, Pierre M., 2008. "Firms’ location Under taste and demand heterogeneity," CORE Discussion Papers 2008071, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Greenaway, David & Hine, Robert C & Milner, Chris, 1995. "Vertical and Horizontal Intra-industry Trade: A Cross Industry Analysis for the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(433), pages 1505-18, November.
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  25. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
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  30. Toshihiro Okubo & Pierre M. Picard & Jacques-François Thisse, 2010. "On zero and asymmetric trade flows," CREA Discussion Paper Series 10-08, Center for Research in Economic Analysis, University of Luxembourg.
  31. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
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