Working Paper: NBER ID: w14214
Authors: Costas Arkolakis
Abstract: I develop a new theory of marketing costs and introduce it into a model of trade with product differentiation and firm productivity heterogeneity. In this model, a firm enters a market if it makes profits by reaching a single consumer there and pays an increasing marginal cost to access additional consumers. This market penetration cost introduces an extensive margin of new consumers in firms' sales. I calibrate the key parameters of the model to match data on French firms from Eaton, Kortum and Kramarz, in particular the higher sales in France of firms that choose to export to more destinations. The model predicts that most firms do not export, and that a large proportion of firms that export in particular markets do so in small amounts. These predictions are in line with the French data, but together create a puzzle for models with a fixed cost of exporting, such as those of Melitz and Chaney. Looking at the comparative statics of trade liberalization, I find that the model predicts large increases in trade in goods with positive but little previous trade, in line with Kehoe and Ruhl. The model implies that these increases can contribute to new trade significantly more than the corresponding increases due to new exporters.
Keywords: market penetration costs; international trade; firm productivity; consumer behavior
JEL Codes: F12; F15; L11; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market penetration costs (L11) | Firm entry into a market (L13) |
| Productivity (O49) | Number of consumers reached (D16) |
| Number of consumers reached (D16) | Sales (L81) |
| Trade liberalization (F13) | Increased trade volumes (F10) |
| Low productivity (O49) | Low sales for less productive firms (D22) |