What Drives Home Market Advantage?

Posted: 29 Sep 2015

See all articles by Kerem Cosar

Kerem Cosar

Stockholm School of Economics - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Bogazici University - Center for Economics and Econometrics

Paul L.E. Grieco

Pennsylvania State University - Department of Economics

Shengyu Li

Durham University

Felix Tintelnot

University of Chicago Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: September 2015

Abstract

In the automobile industry, as in many tradable goods markets, firms earn their highest market share within their domestic market. This home market advantage persists despite substantial integration of international markets during the past several decades. The goal of this paper is to quantify the supply- and demand-driven sources of the home market advantage and to understand their implications for international trade and investment. Building on the random coefficients demand model developed by Berry, Levinsohn, and Pakes (1995), we estimate demand and supply in the automobile industry for nine countries across three continents, allowing for unobserved taste and cost variation at the car model and market levels. While trade and foreign production costs as well as taste heterogeneity matter for market outcomes, we find that preference for domestic brands is the single most important driver of home market advantage - even after controlling for brand histories and dealer networks.

Keywords: automobile industry, market segmentation, trade and foreign direct investment

JEL Classification: F1, L1

Suggested Citation

Cosar, A. Kerem and Grieco, Paul L.E. and Li, Shengyu and Tintelnot, Felix, What Drives Home Market Advantage? (September 2015). CEPR Discussion Paper No. DP10852. Available at SSRN: https://ssrn.com/abstract=2666996

A. Kerem Cosar (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
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Bogazici University - Center for Economics and Econometrics ( email )

Bogazici Universitesi
Bebek
Istanbul, 34342
Turkey

Paul L.E. Grieco

Pennsylvania State University - Department of Economics ( email )

University Park
State College, PA 16802
United States

Shengyu Li

Durham University ( email )

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Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

Felix Tintelnot

University of Chicago Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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