Emami Namini/López Julian Emami Namini Erasmus University Rotterdam IU Microeconomics Workshop, 09...

Emami Namini/López

Julian Emami NaminiErasmus University Rotterdam

IU Microeconomics Workshop, 09 January 2008

Ricardo A. LópezIndiana University,

Bloomington

International trade with

horizontal and vertical

product differentiation and

heterogeneous firms

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Emami Namini/López1

Introduction

1. Melitz (2003), Econometrica

•exporters more productive than non–

exporters

1.1 Theoretical literature on firms‘ export behavior

2. Eaton/Kortum/Kramarz (2005),

Working Paper

• symmetric countries: exporters

export to each country

hierarchy of markets

•

implicitly:

asymmetric

countries: only more productive firms export to

smaller market

— more productive firms export to more markets 2 of 20

Emami Namini/López

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:

1Introduction

3. Bekkers (2007), Working Paper

•exporting firms: higher quality & higher price

•identical quality for each destination market

1.1 Theoretical literature on firms‘ export behavior – ctd.

•

implicitly:

asymmetric

countries: only higher quality firms export to

smaller market

asymmetric

countries: only higher productivity firms export to

smaller market3 of 20

Emami Namini/López

This

paper1.on average:

productivity exporters > productivity non–exporters

1.2 Empirical literature on firms‘ export behavior

/ Lawless (2007), Working

Paper = Melitz

(2003)

1Introduction

0.1

.2.3

.4D

ensi

ty

-5 0 5 10 15logtfp

Non-Exporters Exporters

All Manufacturing

data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999

4 of 20

Emami Namini/López

This

paper

1.2 Empirical literature on firms‘ export behavior – ctd.


Paper – ctd.≠ Melitz

(2003)

1Introduction

2.however:

‘many’ non–exporters more productive than exporters

0.1

.2.3

.4.5

Den

sity

0 5 10 15logtfp


Food

0.2

.4.6

.8D

ensi

ty

2 4 6 8 10logtfp


Textiles & Apparel

0.1

.2.3

.4.5

Den

sity

0 2 4 6 8 10logtfp


Wood Products

0.2

.4.6

.8D

ensi

ty

4 5 6 7 8logtfp


Other Manufacturing

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Emami Namini/López


This

paper



Paper – ctd.≠ Melitz

(2003)

1Introduction

3.# of export destinations:

‘many’ firms export to limited number of countries

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

number of destination markets

per c

ent

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Emami Namini/López

This

paper



Paper – ctd.

≠ Melitz

(2003)

1Introduction

4.market 1 & market 2:

market share firm 1 > (<) market

share firm 25.less productive firms may export to

smaller market≠ Melitz

(2003)1.3 Theoretical contribution of this paper

Theoretical model to explain additional empirical evidence

on export behavior 7 of 20

Emami Namini/López2 This model — preliminaries

2.1Households

CES utility function over N varieties of

differentiated good

• only labor,

numéraire good

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,

11

dqU = 2 – for simplicity

firm

index

2.2Countries

• countries differ

in size

quality level of

firm

• # goods? Partial equilibrium setup;analyzed sector: IRS: fixed

costs

Emami Namini/López

• high (low) tech high (low) fixed costs

• decision for each market: high /

low tech

• Dixit–Stiglitz monopolistic competition

between firms

2 This model — preliminaries2.3 Firms

• serving domestic/foreign market:

fixed costs

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• ex–ante uncertainty

about MC:1. market entry – sunk costs – technology

unknown2. draw of technology

parameters


2.3 Firms — ctd.

• per unit

costs:

2 kackMC

random variables

choice variable — ‘some’ influence on technologies;

high / low tech: aH < aL

choice variable: quality level

• variable

profits .25.012

IPack k

• profit maximizing

quality level:

kac

k

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k MC for zero

quality outputc MC for each unit

quality

Emami Namini/López

profit maximizing

price level:

2 This model — preliminaries2.3 Firms — ctd.

• profit maximizing

quality level:kac

k

.4 kp

k

c

0 k

c

c

k

c

• identical p

• quality

• market share

k • p

• quality

• market share

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random variable

random variable

deman

d:k

D

ack

IPq

25.0


2.3 Firms — ctd.

• aH / aL? High / low

tech?

LH aa .LH ff Assumptio

n:&

• firm chooses high

tech if L

L

H

H

fack

PIf

ack

PI

high tech profits > low tech profits

k

c

0 k

c

c

k

high tech

low techI

technology separation line – country specific

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2.3 Firms — ctd.

iso–revenue

curves? k

kack

PIR

H

H

aRPI

kc

21

LL

aRPI

kc

21

high tech:

low tech:

k

c

0 k

c

c

k

iso–revenue curve low techiso–revenue curve high tech

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2.4 Course of events

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time

market entry — sunk costs fE

draw of random variables c & k

decision: production & technology

decision: market exit

productionrandom shock: market exit


2.4 Success of market entry

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k

c

0 k

c

c

k

random variable

random variable

L

L

fack

PI

• variable

profits :

variable

profits

• production after entry only

ifvariable

profits

fixed

costs≥

• zero profit

condition

low tech

high tech

zero profit condition

exit

production

Emami Namini/López

random variable

random variable

3 Open economy equilibrium3.1 Productivity and export behavior (1)

ic

c

c

0 ikkk

zero profit condition —

domestic market

technology separation line — both markets

Ø non–exporting firm

zero profit condition — foreign market

Result 1:

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per unit costs Ø exporting firm

Ø exporting firm

<per unit costs Ø non – exporting firm

Emami Namini/López

, but only firm 2 exports to small foreign market.

random variable

random variable

3 Open economy equilibrium3.1 Productivity and export behavior (2)

ic

c

c

0 ikkk

zero profit condition — large

foreign market

technology separation line — large foreign

market

firm

1

firm 2

zero profit condition — small foreign

market

2k1k

Result 1:

p

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firm 1 has lower per unit costs ( higher productivity)

technology separation line — small foreign market

Emami Namini/López

Result 2: if firms have identical market share in large

country , they must have

identical export behavior w.r.t. small foreign country!

if firms have identical market share in large foreign country

3 Open economy equilibrium3.2 Market share and export behavior (1)

ic

c

c

0 ikkk

zero profit condition — large

foreign market

technology separation line — large foreign market

firm 1 firm

2

zero profit condition — small foreign

market

2k1k

Result 2:

iso–revenue curve large

foreign market

iso–revenue curve small/large foreign

market

random variable

random variable

technology separation line — small foreign market

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Emami Namini/López

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

3 Open economy equilibrium3.2 Market share and export behavior (2)

ic

c

c

0 ikkk

firm 1

firm 2

Result 3:

ic

c

c

0 ikkk

firm 1

firm 2

large foreign country

small foreign country

technology separation line

technology separation line

iso–revenue curve high

tech

iso–revenue

curve low tech

random variable

random variable

random variable

random variable

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Emami Namini/López4 Conclusions

• actual export behavior of firms more complex than

predicted by Meltiz (2003) and others:

• theoretical

setup:

• ranking of firms w.r.t. market shares differs

between countries

• of export destinations not related to

productivity

• less productive firms may export to

smaller market

2ikiii ackMC

• so far:

theoretical results in line with new empirical evidence on

firms‘ export behavior 20 of 20

Emami Namini/López Julian Emami Namini Erasmus University Rotterdam IU Microeconomics Workshop, 09...

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