Accessible Requires Authentication Published by De Gruyter November 29, 2009

Trade and Variety in a Model of Endogenous Product Differentiation

Oliver Lorz and Matthias Wrede

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 will 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 between these varieties.

Published Online: 2009-11-29

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