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Trade, Economic Geography and the Choice of Product Quality

  • Pierre M. Picard

    ()

    (CREA, University of Luxembourg and CORE, Universit é Catholique de Louvain)

The present paper studies the effect of the choice of product quality on trade and location of firms. We build a quality-augmented 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 de- velopment. 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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File URL: http://wwwfr.uni.lu/content/download/57175/676717/file/2012-11%20-%20Trade,%20Economic%20Geography%20and%20the%20Choice%20of%20Product%20Quality.pdf
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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 12-11.

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Date of creation: 2012
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Handle: RePEc:luc:wpaper:12-11
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  1. Maurice Kugler & Eric A. Verhoogen, 2007. "Product Quality at the Plant Level: Plant Size, Exports, Output Prices and Input Prices in Colombia," Discussion Papers 0708-12, Columbia University, Department of Economics.
  2. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  3. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1450-1476.
  4. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  12. 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.
  13. Eckel, Carsten & Iacovone, Leonardo & Javorcik, Beata & Neary, J Peter, 2011. "Multi-Product Firms at Home and Away: Cost- versus Quality-based Competence," CEPR Discussion Papers 8186, C.E.P.R. Discussion Papers.
  14. 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.
  15. Kalina Manova & Zhiwei Zhang, 2012. "Export Prices Across Firms and Destinations," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 379-436.
  16. Behrens, Kristian, 2005. "How endogenous asymmetries in interregional market access trigger regional divergence," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 471-492, September.
  17. Pierre M. Picard & Toshihiro Okubo, 2011. "Firms Location under Demand Heterogeneity," CREA Discussion Paper Series 11-07, Center for Research in Economic Analysis, University of Luxembourg.
  18. Picard, P. M. & Toulemonde, E., 2003. "Regional asymmetries: economies of agglomeration versus unionized labor markets," Regional Science and Urban Economics, Elsevier, vol. 33(2), pages 223-249, March.
  19. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  20. Fukao, Kyoji & Ishido, Hikari & Ito, Keiko, 2003. "Vertical intra-industry trade and foreign direct investment in East Asia," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 468-506, December.
  21. Kevin M.Shleifer Murphy & Andrei, 1991. "Quality and Trade," University of Chicago - George G. Stigler Center for Study of Economy and State 66, Chicago - Center for Study of Economy and State.
  22. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
  23. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 2003. "Agglomeration and economic geography," CORE Discussion Papers 2003016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  24. 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.
  25. 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).
  26. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  27. 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.
  28. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
  29. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
  30. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May.
  31. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  32. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
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