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Globalization, Product Differentiation and Wage Inequality

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  • Bastos, Paulo
  • Straume, Odd Rune

Abstract

This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is consistent with panel data on Chilean manufacturing plants.

Suggested Citation

  • Bastos, Paulo & Straume, Odd Rune, 2011. "Globalization, Product Differentiation and Wage Inequality," IDB Publications (Working Papers) 1971, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:1971
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    2. Brander, James A. & Spencer, Barbara J., 2015. "Intra-industry trade with Bertrand and Cournot oligopoly: The role of endogenous horizontal product differentiation," Research in Economics, Elsevier, vol. 69(2), pages 157-165.
    3. Kreickemeier, Udo & Meland, Frode, 2011. "International trade, union wage premia, and welfare in general equilibrium," University of Tübingen Working Papers in Business and Economics 5, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    4. Colacicco, Rudy, 2012. "The "Average" Within-Sector Firm Heterogeneity in General Oligopolistic Equilibrium," MPRA Paper 40212, University Library of Munich, Germany.
    5. Charles M. Beach, 2016. "Changing income inequality: A distributional paradigm for Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(4), pages 1229-1292, November.
    6. Fujiwara, Kenji, 2017. "Trade and FDI liberalization in a general oligopolistic equilibrium," Japan and the World Economy, Elsevier, vol. 41(C), pages 45-49.
    7. Colacicco, Rudy, 2012. "Strategic Trade Policy in General Oligopolistic Equilibrium," MPRA Paper 38118, University Library of Munich, Germany.
    8. Udo Kreickemeier & Frode Meland, 2017. "Non-Traded Goods, Globalization, and Union Influence," World Scientific Book Chapters, in: International Trade and Labor Markets Welfare, Inequality and Unemployment, chapter 7, pages 173-201, World Scientific Publishing Co. Pte. Ltd..
    9. Kenji Fujiwara & Keita Kamei, 2018. "Trade liberalization, division of labor and welfare under oligopoly," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 27(1), pages 91-101, January.
    10. Colacicco, Rudy, 2021. "Environment, imperfect competition, and trade: Insights for optimal policy in general equilibrium," Research in Economics, Elsevier, vol. 75(2), pages 144-151.
    11. Atif, Syed Muhammad, 2012. "Critical Review of 'A Simple Model of Firm Heterogeneity, International Trade and Wages'," MPRA Paper 42334, University Library of Munich, Germany.
    12. Dutta, Meghna & Kar, Saibal & Marjit, Sugata, 2013. "Product variety, finite changes and wage inequality," Economic Modelling, Elsevier, vol. 35(C), pages 610-613.
    13. Onur A. Koska, 2020. "Sourcing product quality for foreign market entry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(3), pages 669-702, August.
    14. OKOSHI Hirofumi, 2021. "Innovation for Tax Avoidance: Product Differentiation and the Arm's Length Principle," Discussion papers 21038, Research Institute of Economy, Trade and Industry (RIETI).
    15. Feng, Xiaohua, 2018. "Effect of intra-industry trade on skill premium in manufacturing in China," China Economic Review, Elsevier, vol. 47(C), pages 206-218.
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    17. Rudy Colacicco, 2015. "Ten Years Of General Oligopolistic Equilibrium: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 29(5), pages 965-992, December.

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    Keywords

    IDB-WP-184;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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