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Trade and Variety in a Model of Endogenous Product Differentiation


  • Oliver Lorz

    () (RWTH Aachen University)

  • Matthias Wrede

    () (Philipps-University Marburg)


This paper sets up a model of endogenous product differentiation to analyze the variety effects of international trade. In our model multi-product firms decide not only about the number of varieties they supply but also about the degree of horizontal differentiation between these varieties. Firms can raise the degree of differentiation by investing variety-specific fixed costs. In this setting, we analyze how trade integration, i.e. an increase in market size, influences the number of firms in the market, the number of product varieties supplied by each firm, and the degree of differentiation.

Suggested Citation

  • Oliver Lorz & Matthias Wrede, 2009. "Trade and Variety in a Model of Endogenous Product Differentiation," MAGKS Papers on Economics 200902, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:200902

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    References listed on IDEAS

    1. Allanson, Paul & Montagna, Catia, 2005. "Multiproduct firms and market structure: An explorative application to the product life cycle," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 587-597, September.
    2. Nocke, Volker & Yeaple, Stephen R, 2008. "Globalization and the Size Distribution of Multiproduct Firms," CEPR Discussion Papers 6948, C.E.P.R. Discussion Papers.
    3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    4. Carsten Eckel, 2009. "Endogenous Sunk Costs, Flexible Manufacturing and the Productivity Effects of International Trade," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(2), pages 369-386, June.
    5. Brambilla, Irene, 2009. "Multinationals, technology, and the introduction of varieties of goods," Journal of International Economics, Elsevier, vol. 79(1), pages 89-101, September.
    6. Ulrich Doraszelski & Michaela Draganska, 2006. "MARKET SEGMENTATION STRATEGIES OF MULTIPRODUCT FIRMS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 125-149, March.
    7. John Baldwin & Wulong Gu, 2009. "The Impact of Trade on Plant Scale, Production-Run Length and Diversification," NBER Chapters,in: Producer Dynamics: New Evidence from Micro Data, pages 557-592 National Bureau of Economic Research, Inc.
    8. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
    9. Carsten Eckel, 2006. "Trade and Diversity: Is There a Case for 'Cultural Protectionism?'," German Economic Review, Verein für Socialpolitik, vol. 7, pages 403-418, November.
    10. Simon P. Anderson & André de Palma, 2003. "Market Performance With Multiproduct Firms," Virginia Economics Online Papers 357, University of Virginia, Department of Economics.
    11. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 188-217.
    12. Volker Nocke & Stephen Yeaple, 2006. "Globalization and Endogenous Firm Scope," NBER Working Papers 12322, National Bureau of Economic Research, Inc.
    13. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2011. "Multiproduct Firms and Trade Liberalization," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1271-1318.
    14. Robert Feenstra & Hong Ma, 2007. "Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition," NBER Working Papers 13703, National Bureau of Economic Research, Inc.
    15. Hélène Erkel-Rousse, 1997. "Endogenous Differentiation Strategies, Comparative Advantage and the Volume of Trade," Annals of Economics and Statistics, GENES, issue 47, pages 121-149.
    16. Simon P. Anderson & André Palma, 2006. "MARKET PERFORMANCE WITH MULTIPRODUCT FIRMS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 95-124, March.
    17. repec:adr:anecst:y:1997:i:47:p:07 is not listed on IDEAS
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    Cited by:

    1. Shon M. Ferguson, 2015. "Endogenous Product Differentiation, Market Size and Prices," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 45-61, February.
    2. Irlacher, Michael, 2014. "Multi-Product Firms, Endogenous Sunk Costs, and Gains from Trade through Intra-Firm Adjustments," Discussion Papers in Economics 21023, University of Munich, Department of Economics.
    3. Luciano Fanti & Luca Gori, 2017. "A product innovation game with managerial delegation," Discussion Papers 2017/223, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

    More about this item


    Product differentiation; multi-product firms; international trade.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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