Trade and Variety in a Model of Endogenous Product Differentiation
12 Pages Posted: 27 May 2008 Last revised: 12 Jan 2009
Date Written: January 10, 2009
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.
Keywords: Product differentiation, multi-product firms, international trade
JEL Classification: D43, F12, L25
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