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Globalization, product differentiation and wage inequality

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  • Paulo Bastos
  • Odd Rune Straume

Abstract

This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms' strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Greater 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 supported by panel data on Chilean manufacturing plants.

Suggested Citation

  • Paulo Bastos & Odd Rune Straume, "undated". "Globalization, product differentiation and wage inequality," Discussion Papers 10/03, University of Nottingham, GEP.
  • Handle: RePEc:not:notgep:10/03
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    Cited by:

    1. 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.
    2. Colacicco, Rudy, 2012. "The "Average" Within-Sector Firm Heterogeneity in General Oligopolistic Equilibrium," MPRA Paper 40212, University Library of Munich, Germany.
    3. Fujiwara, Kenji, 2017. "Trade and FDI liberalization in a general oligopolistic equilibrium," Japan and the World Economy, Elsevier, vol. 41(C), pages 45-49.
    4. 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..
    5. 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.
    6. Dutta, Meghna & Kar, Saibal & Marjit, Sugata, 2013. "Product variety, finite changes and wage inequality," Economic Modelling, Elsevier, vol. 35(C), pages 610-613.
    7. Rudy Colacicco, 2016. "-Environment, Imperfect Competition, and Trade: Insights for Optimal Policy in General Equilibrium," Economics, Finance and Accounting Department Working Paper Series n273-16.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    8. Udo Kreickemeier & Frode Meland, "undated". "International Trade, Union Wage Premia, and Welfare in General Equilibrium," Discussion Papers 11/05, University of Nottingham, GEP.
    9. repec:eee:chieco:v:47:y:2018:i:c:p:206-218 is not listed on IDEAS
    10. Rudy Colacicco, 2015. "Ten Years Of General Oligopolistic Equilibrium: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 29(5), pages 965-992, December.
    11. Colacicco, Rudy, 2012. "Strategic Trade Policy in General Oligopolistic Equilibrium," MPRA Paper 38118, University Library of Munich, Germany.

    More about this item

    Keywords

    Trade liberalization; Product differentiation; Innovation; Wage Inequality; General Oligopolistic Equilibrium.;

    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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