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GTAP Resource #1743

"Sub-national Differentiation and the Role of the Firm in Optimal International Pricing"
by Balistreri, Edward J. and James Markusen

A common feature in many trade policy applications is the Armington (1969) assumption of national product differentiation. Other models include assumptions of differentiation at the firm level. We explore a generalized model that accommodates both types of differentiation to illuminate the relationship between optimal firm pricing and optimal trade policy. We assume a nested demand system that is controlled by the elasticity of substitution between national composite products, and the elasticity of substitution between firm-level products (which combine to makeup the national composite varieties). We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their terms of trade through trade distortions, because firms play an important preemptive role in optimally pricing unique varieties. We contrast this with standard applications of perfect-competition Armington models, which exhibit high optimal tariffs -- even for relatively small countries.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Balistreri, E. (5/1/2005)
Updated: Balistreri, E. (4/16/2007)
Visits: 1,964
No keywords have been specified.

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