Product differentiation, competition, and international trade

Abstract

In this paper the two workhorse theories of international trade under imperfect competition -Krugman's taste for variety model and Brander's strategic intraindustry trade model -are integrated into a single analytical framework. A quadratic utility function allows for a nesting of these two theories by postulating a consumer taste for variety over differentiated products, where the extent of product differentiation is linked to the intensity of strategic interaction among firms. The model yields intuitive predictions on the effects of the degree of product differentiation on the volume of trade and on the composition of the gains from trade under imperfect competition. JEL classification: F12Différenciation de produits, concurrence et commerce international. Ce mémoire intègre deux théories connues du commerce international en régime de concurrence imparfaitele modèle du goût pour la variété de Krugman et celui du commerce intra-industrie de Brander -en un seul cadre analytique. Une fonction d'utilité quadratique permet d'encadrer ces deux théories en postulant que le consommateur a un goût pour la variété dans une gamme de produits différenciés où le degré de différenciation est relié à l'intensité de l'interaction stratégique entre les entreprises. Le modèle engendre des prévi-sions quant aux effets du degré de différenciation des produits sur le volume de commerce international et la composition des gains résultant de ce commerce en régime de concurrence imparfaite.

Product Differentiation, the Volume of Trade and Profits under Cournot and Bertrand Duopoly

“…Qualitatively similar results are obtained under both Cournot duopoly and Bertrand duopoly, although it is shown that the volume of trade is higher under Bertrand duopoly than under Cournot duopoly except when the trade cost is relatively high. Also, the paper extends the analysis of Anderson, Donsimoni and Gabszewicz (1989) and Bernhofen (2001) …”

“…The 'new trade theory' explains intra-industry trade using monopolistic competition and oligopoly models that stress the role of imperfect competition, economies of scale and product differentiation. Conventional wisdom suggests that the volume of intra-industry trade is increasing in the degree of product differentiation, and this view is supported by the results of Bernhofen (2001). This paper will re-examine how product differentiation affects the volume of trade under oligopoly.…”

“…This paper analyses how product differentiation affects the volume of trade under duopoly using Shubik-Levitan demand functions rather than the Bowley demand functions used by Bernhofen (2001). The Shubik-Levitan demand functions have the advantage that an increase in product differentiation does not increase the size of the market as happens with the Bowley demand functions.…”

“…2 Bernhofen (2001) analysed the effect of product differentiation on the volume of trade in a symmetric oligopoly model using Bowley demand functions and assuming that the trade cost is zero. He showed that the volume of trade (in terms of quantities and values) was increasing in the degree of product differentiation under Cournot oligopoly and under Bertrand oligopoly.…”

“…He showed that the volume of trade (in terms of quantities and values) was increasing in the degree of product differentiation under Cournot oligopoly and under Bertrand oligopoly. This paper will re-examine how product differentiation affects the volume of trade under duopoly using Shubik-Levitan demand functions rather than the Bowley demand functions used by Bernhofen (2001), and assuming that the trade cost is positive rather than zero. The Shubik-Levitan demand functions have the advantage that an increase in product differentiation does not increase the size of the market as happens with the Bowley demand functions.…”