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Julian Emami Namini

International trade with horizontal and vertical product differentiation and heterogeneous firms. Julian Emami Namini. Ricardo A. López. Erasmus University Rotterdam. Indiana University , Bloomington. IU Microeconomics Workshop, 09 January 2008. 1 of 20. 1 Introduction.

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Julian Emami Namini

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  1. International trade with horizontal and vertical product differentiation and heterogeneous firms Julian Emami Namini Ricardo A. López Erasmus University Rotterdam Indiana University, Bloomington IU Microeconomics Workshop, 09 January 2008 1 of 20

  2. 1 Introduction 1.1 Theoretical literature on firms‘ export behavior • 1. Melitz (2003), Econometrica • exporters more productive than non–exporters • symmetric countries: exporters export to each country asymmetric countries: • implicitly: only more productive firms export to smaller market 2. Eaton/Kortum/Kramarz (2005), Working Paper hierarchy of markets — more productive firms export to more markets 2 of 20

  3. 1 Introduction 1.1 Theoretical literature on firms‘ export behavior – ctd. • 3. Bekkers (2007), Working Paper • exporting firms: higher quality & higher price • identical quality for each destination market asymmetric countries: • implicitly: only higher quality firms export to smaller market • 4. Raff/Stähler/VanLong (2007), Working Paper • R & D–decision by firms • productivity gains with exposure to trade: • more R & D by exporting firms • implicitly: asymmetric countries: only higher productivity firms export to smaller market 3 of 20

  4. 1 Introduction 1.2 Empirical literature on firms‘ export behavior This paper / Lawless (2007), Working Paper 1. on average: productivity exporters > productivity non–exporters = Melitz (2003) data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999 4 of 20

  5. 1 Introduction 1.2 Empirical literature on firms‘ export behavior – ctd. This paper / Lawless (2007), Working Paper – ctd. 2. however: ‘many’ non–exporters more productive than exporters ≠ Melitz (2003) data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999 5 of 20

  6. 1 Introduction 1.2 Empirical literature on firms‘ export behavior – ctd. This paper / Lawless (2007), Working Paper – ctd. 3. # of export destinations: ‘many’ firms export to limited number of countries ≠ Melitz (2003) data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999 6 of 20

  7. 1 Introduction 1.2 Empirical literature on firms‘ export behavior – ctd. This paper / Lawless (2007), Working Paper – ctd. 4. market 1 & market 2: market share firm 1 > (<) market share firm 2 ≠ Melitz (2003) ≠ Melitz (2003) 5. less productive firms may export to smaller market 1.3 Theoretical contribution of this paper Theoretical model to explain additional empirical evidence on export behavior 7 of 20

  8. 2This model — preliminaries 2.1Households CES utility function over N varieties of differentiated good s = 2 – for simplicity quality level of firm f firm index 2.2Countries • only labor, numéraire good • # goods? Partial equilibrium setup; • analyzed sector: IRS: fixed costs • countries differ in size 8 of 20

  9. 2This model — preliminaries 2.3Firms • ex–ante uncertainty about MC: 1. market entry – sunk costs – technology unknown 2. draw of technology parameters • serving domestic/foreign market: fixed costs • decision for each market: high / low tech • high (low) tech  high (low) fixed costs • Dixit–Stiglitz monopolistic competition between firms 9 of 20

  10. 2This model — preliminaries 2.3Firms — ctd. • per unit costs: choice variable — ‘some’ influence on technologies; high / low tech: aH < aL kMC for zero quality output random variables choice variable: quality level cMC for each unit quality • variable profits • profit maximizing quality level: 10 of 20

  11. 2This model — preliminaries 2.3Firms — ctd. • profit maximizing quality level: profit maximizing price level: demand: random variable cf kf • identical pf • quality  • market share  • pf • quality  • market share  random variable 11 of 20

  12. 2This model — preliminaries 2.3Firms — ctd. • aH / aL? High / low tech? Assumption: & • firm chooses high tech if high tech profits > low tech profits low tech high tech technology separation line – country specific 12 of 20

  13. 2This model — preliminaries 2.3Firms — ctd. iso–revenue curves? high tech: low tech: iso–revenue curve low tech iso–revenue curve high tech 13 of 20

  14. 2This model — preliminaries 2.4Course of events market entry — sunk costs fE draw of random variables c & k decision: market exit decision: production & technology random shock: market exit production time 14 of 20

  15. 2This model — preliminaries 2.4Success of market entry random variable exit zero profit condition low tech production • variable profits : variable profits  high tech random variable • production after entry only if variable profits ≥ fixed costs • zero profit condition 15 of 20

  16. 3Open economy equilibrium 3.1Productivity and export behavior (1) random variable Ø non–exporting firm zero profit condition — domestic market zero profit condition — foreign market Ø exporting firm technology separation line — both markets random variable Result 1: per unit costs Ø exporting firm < per unit costs Ø non – exporting firm 16 of 20

  17. 3Open economy equilibrium 3.1Productivity and export behavior (2) random variable firm 1 zero profit condition — large foreign market firm 2 zero profit condition — small foreign market technology separation line — large foreign market technology separation line — small foreign market random variable p  , but only firm 2 exports to small foreign market. Result 1: firm 1 has lower per unit costs ( higher productivity) 17 of 20

  18. 3Open economy equilibrium 3.2Market share and export behavior (1) iso–revenue curve large foreign market random variable zero profit condition — large foreign market iso–revenue curve small/large foreign market zero profit condition — small foreign market firm 1 firm 2 technology separation line — large foreign market technology separation line — small foreign market random variable Result 2: if firms have identical market share in large country , they must have identical export behavior w.r.t. small foreign country! Result 2: if firms have identical market share in large foreign country 18 of 20

  19. 3Open economy equilibrium 3.2Market share and export behavior (2) random variable random variable large foreign country small foreign country iso–revenue curve high tech iso–revenue curve low tech technology separation line firm 1 firm 1 firm 2 firm 2 technology separation line random variable random variable Result 3: Result 3: large forgein country: market share firm 2 > market share firm 1 small foreign country: market share firm 2 > market share firm 1 Result 3: large forgein country: market share firm 1 > market share firm 2 19 of 20

  20. 4Conclusions • actual export behavior of firms more complex than predicted by Meltiz (2003) and others: • less productive firms may export to smaller market •  of export destinations not related to productivity • ranking of firms w.r.t. market shares differs between countries • theoretical setup: • so far: theoretical results in line with new empirical evidence on firms‘ export behavior 20 of 20

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