Working Paper: CEPR ID: DP1106
Authors: Massimo Motta; Jacques-François Thisse; Antonio Cabrales
Abstract: When two countries, starting from different quality levels reflecting different conditions of domestic market demand, open to trade, two possible equilibria arise. In the first, the quality leader maintains its position. In the second, leapfrogging occurs. The latter is possible only if the initial quality gap is not too wide, however. Further, when the risk dominance criterion is used, only the former equilibrium is selected. This result holds for both segmented and integrated markets. Qualities, profits and world welfare are higher when firms can price discriminate (i.e. under segmented markets).
Keywords: International Trade; Product Differentiation; Country Asymmetries; Integrated Markets; Segmented Markets; Equilibrium Selection
JEL Codes: F12; F15; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial quality differences (L15) | persistence of leadership (M54) |
| initial quality differences (L15) | leapfrogging (O39) |
| persistence of leadership (M54) | high investments required for lagging firm to catch up (D25) |
| domestic market demand (R22) | international competitiveness (F23) |
| historical conditions (B15) | international competitiveness (F23) |
| higher quality (L15) | increased profits (L21) |
| higher quality (L15) | increased welfare (I38) |