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 market 3 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.
/ Lawless (2007), Working
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
Non-Exporters Exporters
Food
0.2
.4.6
.8D
ensi
ty
2 4 6 8 10logtfp
Non-Exporters Exporters
Textiles & Apparel
0.1
.2.3
.4.5
Den
sity
0 2 4 6 8 10logtfp
Non-Exporters Exporters
Wood Products
0.2
.4.6
.8D
ensi
ty
4 5 6 7 8logtfp
Non-Exporters Exporters
Other Manufacturing
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data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999
Emami Namini/López
data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999
This
paper
1.2 Empirical literature on firms‘ export behavior – ctd.
/ Lawless (2007), Working
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
1.2 Empirical literature on firms‘ export behavior – ctd.
/ Lawless (2007), Working
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
Emami Namini/López2 This model — preliminaries
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:
kack
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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:
kack
.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
demand: k
D
ackIPq
25.0
Emami Namini/López2 This model — preliminaries
2.3 Firms — ctd.
• aH / aL? High / low
tech?
LH aa .LH ff Assumption:
&
• firm chooses high tech if
LL
HH
fack
PIfack
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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Emami Namini/López2 This model — preliminaries
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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Emami Namini/López2 This model — preliminaries
2.4 Course of events
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market entry — sunk costs fE
draw of random variables c & k
decision: production & technology
decision: market exit
productionrandom shock: market exit
Emami Namini/López2 This model — preliminaries
2.4 Success of market entry
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k
c
0 k
c
c
k
random variable
random variable
LL
fack
PI
• variable profits :
variable profits
• production after entry only if
variable 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)
icc
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)
icc
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)
icc
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 1small 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)
icc
c
0 ikkk
firm 1
firm 2
Result 3:
icc
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