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Intransparent Markets and Intra-Industry Trade

  • Christian Gormsen

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Buyers are typically unaware of the full set of offers when making a purchase. This paper examines how international trade interacts with this problem of market intransparency. Sellers must communicate their offers through costly advertising, but cannot reach all buyers. Consequently, no market clearing price exists, and sellers randomize over an equilibrium price distribution. Sellers will wish to spread advertisement costs across markets, leading to international trade, which would not take place under complete information. Buyers then receive more offers, leading to lower prices and buyer surplus gains. Sellers in the model are identical, but appear heterogeneous due to their price randomization. If sellers differ slightly, these differences will be greatly magnified. Finally, the model rationalizes very infrequent exporters as firms offering disadvantageous, but profitable, deals to foreign buyers.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00678264.

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Date of creation: Mar 2012
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Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2012.17 - ISSN : 1955-611X. 2012
Handle: RePEc:hal:cesptp:halshs-00678264
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00678264
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