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Trade costs and international strategy of firms: the role of endogenous product differentiation

Author

Listed:
  • Pierre Blanchard

    (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)

  • Carl Gaigné

    (SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST, Centre de recherche CREATE - ULaval - Université Laval [Québec])

  • Claude Mathieu

    (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)

Abstract
We study the impact of trade liberalization on the international strategy of firms (to export and/or invest abroad as well as the number of products to be produced) when product differentiation is endogenous. By considering product differentiation as a strategic variable, our analysis sheds new light on the impact of trade barriers on the decision to produce abroad and on the choice of product range, in accordance with recent empirical evidence. Indeed, we show, even though technology exhibits the same productivity for each variety, firms drop some of varieties with trade integration. In addition, our results reveal that, contrary to the standard theoretical literature, the relationship between the decision to export and trade costs is non-linear. When trade costs are relatively high, each firm export and is multi-product. Then, when trade costs take intermediate values, firms may invest abroad and the choice of producing abroad results from a prisoner's dilemma game. Finally, when trade costs are low, firms export, but become single-product.

Suggested Citation

  • Pierre Blanchard & Carl Gaigné & Claude Mathieu, 2012. "Trade costs and international strategy of firms: the role of endogenous product differentiation," Post-Print hal-01136961, HAL.
    • Handle: RePEc:hal:journl:hal-01136961
    DOI: 10.1016/j.regsciurbeco.2012.07.008
    Note: View the original document on HAL open archive server: https://hal.science/hal-01136961
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    References listed on IDEAS

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    3. Kangsik Choi, 2022. "Organizational form and multiple exportable goods in export rivalry trade," Manchester School, University of Manchester, vol. 90(5), pages 565-586, September.

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    More about this item

    Keywords

    Foreign direct investment; exports; trade integration; endogenuos differentiation product; multi-product competition;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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