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Intransparent markets and intra-industry trade

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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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2012/12017.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 12017.

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Length: 23 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:mse:cesdoc:12017
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  27. Jacques Melitz, 2003. "Language and Foreign Trade," Working Papers 2003-26, Centre de Recherche en Economie et Statistique.
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  35. repec:hrv:faseco:4784031 is not listed on IDEAS
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