What Drives Home Market Advantage?

Abstract

In the automobile industry, as in many tradable goods markets, firms usually earn their highest market share within their domestic market. The goal of this paper is to disentangle the supplyand demand-driven sources of the home market advantage. While trade costs, foreign production costs, and taste heterogeneity all matter for market outcomes, we find that a preference for home brands is the single most important driver of home market advantage -even after controlling for brand histories and dealer networks. Furthermore, we also find that consumers favor domestically producing brands regardless of the historical brand origin.A. Kerem Cosar

Brands in Motion: How Frictions Shape Multinational Production

“…(2018) report in their Table 11 average firm-market markups ranging from 6 percent (Peugeot in Brazil) to 12.4 percent (Peugeot in France). 31 Among the determinants of marketing frictions, consumers are more than twice as likely to select a home brand, corroborating the large home bias found by Coşar et al (2018). In addition, we estimate that increasing consumer distance from headquarters sharply lowers market shares, even controlling for distance from the consumer to the assembly location, which is captured by C bn in the same regression.…”

“…TheCoşar et al (2018) dataset has 9 markets and 60 brands compared to the 76 markets and 138 brands in our estimating sample 6 Grigolon and Verboven (2014). show that nested logit can match fairly closely the cross-price elasticities of a random coefficients model.…”

“…The ℓn distance cost elasticity in column 1 of Table 4 is ρ distance = 0.042. Coşar et al (2018) report a somewhat smaller value of ρ distance = 0.016 (Table 12, column IV). Both estimates of ρ distance , fit in the "reasonable range" of 0.01 to 0.07 in the literature summarized by Head and Mayer (2013).…”

“…] , 25 Our choice set assumption differs from Coşar et al (2018) who estimate a cost function that assumes that only the countries currently producing a model enter the set of alternative sourcing locations. For example in the Coşar et al (2018) approach, the choice set for the Renault Twingo would be France and Colombia in 2006, whereas in 2008 the choice set would switch to Colombia and Slovenia (because Renault relocated all its Twingo production for Europe from France to Slovenia in 2007). In our approach, all the countries where Renault is active in a given year are included in the choice.…”

“…We obtain the 2016 levels as c ℓ = exp(− FE ℓ (1) /θ) q ℓ ς from 34 Goldberg and Verboven (2001) separate out the home bias into demand and cost components. Coşar et al (2018) estimate cost-based ( γ iℓ ) frictions of distance from a brand's home. They also have a home-brand effect in preferences that would operate as a δ in effect in our model.…”