A NOTE ON FOREIGN DIRECT INVESTMENT AND EXPORTS IN VERTICALLY DIFFERENTIATED INDUSTRIES

We examine the FDI versus exports decision of a multiproduct multinational firm which supplies vertically differentiated products, and show that the proximity‐concentration trade‐off can generate FDI‐export coexistence, i.e., the firm supplies the low‐quality products through FDI and the high‐quality products through exports. We also show that the opposite can never happen. Moreover, when the multiproduct multinational firm faces price competition in the target markets, it has an incentive to use trade costs to soften price competition, which can reduce its FDI incentive.     

What’s fit to print: The effect of ownership concentration on product variety in daily newspaper markets

This paper examines the effect of ownership concentration on product position, product variety and circulation in the US daily newspaper market. The effects of consolidation in differentiated product markets cannot be determined solely from theory. Because multi-product firms internalize business stealing, mergers may encourage firms to reposition products, leading to more, not less, variety. Using data on the assignment of reporters to topical areas at 706 newspapers in 1993, 1999 and 2004, results show that both differentiation and variety increase with ownership concentration. Moreover, greater concentration increases variety over a range of topics and does not reduce readership.     

Endogenous Product Differentiation,Market Size and Prices

This paper provides a framework to understand how market size affects firms' investments in product differentiation in a model of monopolistic competition. The theory proposes that consumers' love of variety makes them more sensitive to product differentiation efforts by firms, which leads to more differentiated products in larger markets. The framework also predicts an inverted U ‐shaped effect of trade liberalization on product differentiation, with trade liberalization leading to more differentiated products when starting from autarky but then leading to less differentiated products as the countries approach free trade.     

Maximum-revenue tariffs versus free trade

Welfare with the maximum-revenue tariff is compared to free-trade welfare under Cournot duopoly with differentiated products; under Bertrand duopoly with differentiated products; and under perfect competition in the case of a large country able to affect its terms of trade. Under Cournot duopoly and Bertrand duopoly, assuming linear demands and constant marginal costs, welfare with the maximum-revenue tariff is always higher than free-trade welfare. Under perfect competition, assuming linear demand and supply, welfare with the maximum-revenue tariff will be higher than free-trade welfare if the country has sufficient market power.     

Analysis of Bilateral Trade Patterns With Panel Data

Bilateral trade flows are examined to investigate whether trade patterns are consistent with a simple model of trade in differentiated products. In contrast to previous results in the literature, it is shown that the simple model of trade in differentiated products is often not appropriate for trade among the poor nations. Demand differences among the poor countries are shown to be at least a partial explanation for the deviations from the theoretical predictions.     

Competing Industrial Standards and the Impact of Trade Liberalization

The main purpose of this study is to illustrate, with simple trade theory, the relationship between competing industrial standards and trade liberalization. We assume that there are two competing industrial standards in an international context, each of which applies to a group of differentiated products. A product can be used only in combination with other products based on the same industrial standard. We examine the impact of trade liberalization (i.e., a decline in trade costs) on consumers’ choice of a standard. It will be shown that the degree of indirect network effects, captured with substitution between differentiated products, plays an important role as a determinant of the impact of trade liberalization.     

STRATEGIC EFFECTS OF THREE‐PART TARIFFS UNDER OLIGOPOLY

The distinct element of a three‐part tariff (3PT), compared with linear pricing (LP) or a two‐part tariff, is its quantity target within which the marginal price is zero. This quantity target instrument enriches the firm's strategy set in dictating the competition to a specific level, even in the absence of a usual price discrimination motive. With general differentiated linear demands, the competitive effect of a 3PT in contrast to LP depends on the degree of substitutability between products: Competition is intensified when two products are more differentiated, yet softened when two products are more substitutable.     

Product differentiation and the gains from trade under Bertrand duopoly

Abstract.  In the literature on the welfare effects of free trade under imperfect competition, one important case seems to have been overlooked, and that is the Bertrand duopoly model with differentiated products. Although many authors have analysed the welfare effects of free trade under Cournot duopoly and demonstrated the possibility of losses from trade, there has been no thorough analysis of the welfare effects of free trade under Bertrand duopoly. In this article we present a thorough analysis of the welfare effects of free trade under Bertrand duopoly with differentiated products, and it is shown that there are always gains from trade. JEL Classification: F12     

Horizontal and vertical intra-industry trade in Australian manufacturing: does trade liberalization have any impact?

This paper contributes to the literature on intra-industry trade (IIT) by disentangling such trade into horizontally and vertically differentiated products, and investigating their determinants in the context of trade liberalization in Australia. IIT in Australian manufacturing has increased following trade liberalization in 1980s and is increasingly dominated by vertically differentiated products. Industry level evidence confirms that the failure to segregate IIT into horizontally and vertically differentiated products produces misleading results as their determinants differ. Also, structural changes brought about by the policy liberalization appear to have an impact on total as well vertical IIT.     

Emission Taxes and Product Differentiation in the Presence of Foreign Firms

Industries characterized by differentiated products are important contributors of greenhouse gases and currently subject to market‐based policies such as emission taxes. In the context of developing countries, fears about foreign investment leaving the country are often used as an argument not to address industry emissions through emission taxes. This paper develops a Cournot model with product differentiation in the presence of abatement efforts where host and foreign firms are subject to an emission tax. The analysis indicates that abatement efforts and differences in pollution intensity coefficients across firms may play a significant role in the characterization of optimal policy. The analysis also suggests that the government may opt to encourage foreign, less pollution‐intensive firms via higher taxation. Additionally, this paper examines how an optimal emission tax may be adjusted as products become more differentiated; industry emissions may fall/rise as a result of more differentiated products. One important contribution of this paper is that it emphasizes the role of abatement efforts, product differentiation, and differences in pollution intensity coefficients across firms in the characterization of the optimal emission tax.     

Innovation and duration of exports

This paper uses survival analysis to investigate the effect of innovation on export duration of 105 countries at the product level. The estimation shows that the duration of exports increases with innovation. The effect is stronger for differentiated products than for homogeneous products. The estimates are consistent with the quality ladder model.     

ENTRY AND IMPORT QUOTA

An import quota set stricter than the free trade level is quite common for the domestic entry protection. However, this paper shows that as the products are vertically differentiated, an import quota that is simply set at the original free trade level could be effective on entrant protection. This quota policy also improves both consumer surplus and total domestic welfare, which is in sharp contrast to the implications of existing literature. Our result suggests that an import quota has a stronger protection effect on domestic production if the domestic and foreign products are vertically differentiated.     

Industrial Structure and Australia– UK Intra-Industry Trade

This paper tests industry-specific hypotheses of the determinants of intra-industry trade in the context of Australia-UK trade. In doing so it separates intra-industry trade (ITT) into ITT in horizontally differentiated products and ITT in vertically differentiated products. It finds that the latter is the dominant former of ITT. Further the paper investigates the robustness of empirical results on testing industry-specific hypotheses to the choice of national (UK or Australian) industrial structure characteristics. The assumption of uniform industrial structures across countries adopted in other studies is shown not to be justified.     

Unpriced quality

A monopolist charges the same price for differentiated products when high quality products are likely to be assigned to low valuation consumers. The argument explains the use of ‘unpriced quality’ for concert tickets, movie theaters, and elsewhere.     

TESTING MODELS OF DIFFERENTIATED PRODUCTS MARKETS: CONSOLIDATION IN THE CABLE TV INDUSTRY

Research on differentiated products markets often uses structural demand/supply models to identify firms' marginal costs as product‐level cost data are unavailable. Using unique demand and cost data from cable TV, I evaluate a differentiated products model's ability to identify marginal costs. I find firms systematically price below profit‐maximizing levels, leading to biases in the model's marginal cost estimates. I study the implications for merger simulations and find that these biases compromise estimates of merger‐related cost efficiencies, yet do not prevent these models from generating useful predictions of the price and nonprice effects of mergers.     

Why Do Poor democracies Collect a Lot of Tariff Revenue?

Governments in developing countries typically collect a significantly higher proportion of their revenue in the form of trade taxes, than their developed country counterparts. This paper provides a political–economic explanation for this phenomenon. A model of trade in vertically differentiated products is used in order to determine the preferences of the households among different ways of raising government revenue. It is shown that the majority of households in poor countries will consume low-quality, domestically produced varieties of differentiated products and would thus register a preference for the government to rely more on tariff rather than income tax revenue in order to finance its operations.     

The foreclosure argument for exclusive dealing: The case of differentiated retailers

I analyze a cooperative characteristic-form game between two differentiated producers and a downstream retail sector. When there is a single downstream retailer, the game always has a nonempty Core, involving the retailer being a common dealer. Each producer can at most earn his increment to the collusive industry profit. This result is similar to what is obtained in the literature in an extensive-form noncooperative formulation of the game. When there are two differentiated downstream retailers, the Core is empty when products and retailers are too homogeneous. For sufficient product and retailer differentiation, the Core is nonempty. In these cases the retailers are always common dealers for both products.     

Kreps & Scheinkman with Product Differentiation

Kreps and Scheinkman (1983)’s celebrated result is that in a two-stage model of a market with homogeneous products in which firms noncooperatively pick capacities in the first stage and set prices in the second stage, the equilibrium outcome is that of a one-shot Cournot game. This note derives capacity best response functions for the first stage and extends the Kreps and Scheinkman result to the case of differentiated products.     

Price and quantity competition under free entry

This paper complements that of Cellini et al. (Cellini, R., Lambertini, L., Ottaviano, G. I. P., 2004. Welfare in a differentiated oligopoly with free entry: A cautionary note. Research in Economics, 58:125–33.), which shows that Cournot competition may generate higher welfare compared to Bertrand competition in an economy with free entry. Unlike them, we provide a more general proof for this result and show that Cournot competition generates higher welfare compared to Bertrand competition when the products are sufficiently differentiated. If the products are close substitutes, welfare is higher under Bertrand competition. We show that these qualitative results hold whether or not number of varieties increases market size. We also show when the active firms earn higher profits under Bertrand competition compared to Cournot competition.     

Trade Liberalization and the Degree of Competition in International Duopoly

This paper analyzes how a reduction in trade costs influences the possibility for firms to engage in international cartels, and hence how trade liberalization affects the degree of competition. We consider a particular intra‐industry trade model amended to allow for firms producing differentiated products. Our main finding is that trade liberalization may have an anti‐competitive effect. We find that there is no unique relation between a reduction in trade costs and the degree of competition. When products are differentiated, a lowering of trade costs is pro‐competitive if trade costs are initially high, but anti‐competitive if trade costs initially are low. Hence, trade policy is not necessarily a substitute for competition policy.