Trade and Variety in a Model of Endogenous Product Differentiation

12 Pages Posted: 27 May 2008 Last revised: 12 Jan 2009

See all articles by Oliver Lorz

Oliver Lorz

RWTH Aachen University

Matthias Wrede

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 10, 2009

Abstract

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

Suggested Citation

Lorz, Oliver and Wrede, Matthias, Trade and Variety in a Model of Endogenous Product Differentiation (January 10, 2009). Available at SSRN: https://ssrn.com/abstract=1137605 or http://dx.doi.org/10.2139/ssrn.1137605

Oliver Lorz (Contact Author)

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Matthias Wrede

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Institute of Economics ( email )

Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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