Working Paper: CEPR ID: DP1606
Authors: Inigo Herguera; Stefan Lutz
Abstract: The recent extensive study of vertical product differentiation models has allowed for the analysis of international trade issues in the presence of country asymmetries in terms of product qualities, technology, costs, market size and income. In the presence of such asymmetries, national industries will either be market leaders or be lagging behind in the international marketplace in terms of their product qualities. The resulting asymmetry in profits creates powerful incentives for lagging industries as well as their national governments to reverse this situation to their advantage, i.e. to induce ?leapfrogging? in terms of product qualities. This paper presents an analysis of subsidies as a facilitating device for leapfrogging.
Keywords: vertical product differentiation; oligopoly; trade; quality; leapfrogging; country asymmetries
JEL Codes: F12; F13; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Subsidies (H20) | Product Quality Improvements (L15) |
| 40% Subsidy (H23) | Welfare Improvement (I38) |
| 40% Subsidy (H23) | Consumer Surplus Increase (D11) |
| Subsidies (H20) | Leapfrogging Foreign Competitors (F23) |
| Subsidies (H20) | Static Market Equilibrium (D41) |
| Retaliatory Measures (D74) | Confounding Factor (C39) |