Emami Namini/Lpez

International trade with horizontal and vertical product differentiation and heterogeneous firms Julian Emami
Namini Erasmus University Rotterdam Ricardo A. Lpez
Indiana University, Bloomington

IU Microeconomics Workshop, 09 January 2008

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1 1.1 Theoretical literature on firms export Introduction

behavior
1. Melitz (2003), Econometrica exporters more productive than non exporters symmetric countries: exporters export to each country asymmetric

Emami Namini/Lpez

implicitly: countries: only more productive firms export to smaller market 2. Eaton/Kortum/Kramarz (2005), Working Paper hierarchy of markets more productive firms export to more markets 2 of 20

1 1.1 Theoretical literature on firms export Introduction

behavior ctd. 3. Bekkers (2007), Working Paper
exporting firms: quality & higher price higher

Emami Namini/Lpez

identical quality for each destination asymmetric market only higher quality firms export to smaller implicitly: countries: market 4. Raff/Sthler/VanLong (2007), Working Paper R & Ddecision by firms productivity gains with exposure to trade: asymmetric more R & D by exporting only higher productivity firms export to firms countries:

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1 1.2 Empirical literature on firms export behavior Introduction

This / Lawless (2007), Working 1. Paper paper on average: productivity exporters > productivity nonexporters
All Manufacturing
.4

Emami Namini/Lpez

= Melitz (2003)

.1

Density .2

.3

-5

5 logtfp Non-Exporters

10 Exporters

15

data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 4 of 20 19901999

1 1.2 Empirical literature on firms export Introduction

behavior ctd.
This / Lawless (2007), Working

Emami Namini/Lpez

2.however: paper Paper ctd. many nonexporters more productive than exporters
Textiles & Apparel
Density .4 .6 .8

Melitz (2003)

Food
.5 0 2 .4 4 6 logtfp Non-Exporters 8 Exporters Density .2 .3 10 .4 .5

.2

Wood Products

Density .2 .3

.1

.8

logtfp

10 Exporters

15

.6

0 0

.1

Other Manufacturing

logtfp

8 Exporters

10

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

.2

Density .4

Non-Exporters

Non-Exporters

6 logtfp Non-Exporters

7 Exporters

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1 1.2 Empirical literature on firms export behavior Introduction

ctd.
This / Lawless (2007), Working 3. of export destinations: paper #Paper ctd. many firms export to limited number of countries
70,0 60,0 50,0 per cent 40,0 30,0 20,0 10,0 0,0
1 2 3 4 5 6 7 8 9 10 11 -1 9 20 -2 9 30 +

Emami Namini/Lpez

Melitz (2003)

num ber of destination m ark ets

data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 6 of 20

1 1.2 Empirical literature on firms export behavior Introduction

ctd.
This / Lawless (2007), Working paper Paper ctd. 4.market 1 & market 2: market share firm 1 > (<) market share firm 2 5.less productive firms may export to smaller market

Emami Namini/Lpez

Melitz (2003) Melitz (2003)

1.3 Theoretical contribution of this paper

Theoretical model to explain additional empirical evidence on export behavior
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This model preliminaries

CES utility function over N varieties of differentiated good
U =

Emami Namini/Lpez

2.1 Households

( (q

( 1)

( 1)

= 2 for simplicity

firm index

quality level of firm

2.2 Countries only labor,

numraire good # goods? Partial equilibrium setup; analyzed sector: IRS: fixed costs countries differ
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This model preliminaries

exante uncertainty

Emami Namini/Lpez

2.3 Firms
about MC: 1. market entry sunk costs technology unknown 2. draw of technology parameters serving domestic/foreign market: fixed costs decision for each market: low tech high (low) tech high (low) fixed costs DixitStiglitz monopolistic competition between firms
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high /

This model preliminaries

per unit

Emami Namini/Lpez

2.3 Firms ctd.

choice variable some influence on costs: technologies; high / low tech: aH < aL MC = k + (c + ak ) 2 k MC for zero quality randomchoice variable: output variables quality level c MC for each unit

variable

quality

profits + (c + a ) 2 ) 1 P I 0.25. = (k k profit maximizing

=

quality k level:
c + ak 10 of 20

This model preliminaries

profit maximizing

Emami Namini/Lpez

2.3 Firms ctd.

quality k level: = c + ak profit maximizing price p = 4 k . level:
random c variable
c

deman

D q = 4 .4 4

P I k c + ak

d:

c
4

c identical pk p
quality market share
k

quality market share

k random

variable

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This model preliminaries

aH / aL? High / low tech? chooses high firm
techI if P k (c + aH
c

Emami Namini/Lpez
fH > fL .

2.3 Firms ctd.

Assumptio aH < aL & n:

I P fL

fH >

k (c + aL )

high tech profits

> low tech profits

low I tech

c
0

high tech
k
k

technology separation line country specific

k

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This model preliminaries

isorevenue curves? I P R =
k

Emami Namini/Lpez

2.3 Firms ctd.

k (c + ak )

high tech:

1 c = k 1 c = k

I P R H I P R L

aH aL
2

low tech:
c

c
0

isorevenue curve low tech isorevenue curve high tech

k
k

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This model preliminaries

Emami Namini/Lpez

2.4 Course of events

market entry sunk costs fE

draw of random variables c&k

decision: market exit

decision: technology

production &

random shock: market exit

production
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tim e

This model preliminaries

Emami Namini/Lpez

2.4 Success of market entry c random

variable
c
exi low tech t production high tech zero profit condition

variable profits
k

variable profits :
k

c
0

production after entry only if

k (c + aL )

random variable I P

fL fixed costs 15 of 20

variable

zero profit condition

profits

Open economy equilibrium

random c i variable
c

Emami Namini/Lpez

3.1 Productivity and export behavior (1)

nonexporting firm zero profit condition domestic market zero profit condition foreign market
exporting firm

technology separation line both markets

c
0

ki random

variable

Result 1:firm

per unit costs exporting < per unit costs non exporting firm 16 of 20

Open economy equilibrium

random c i variable
c

Emami Namini/Lpez

3.1 Productivity and export behavior (2)

firm 1 firm 2 zero profit condition large foreign market zero profit condition small foreign market

c
k1 k 2 0

technology separation line large foreign market technology separation line small foreign market k ki random

variable

Result firm 1 has lower per unit costs ( higher , but only 1:productivity) firm 2 exports to small foreign market.

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Open economy equilibrium

random c i variable
c
curve large foreign market

Emami Namini/Lpez

3.2 Market share and export behavior (1) isorevenue

zero profit condition large foreign market

isorevenue curve small/large foreign market

firm 1 firm 2

zero profit condition small foreign market technology separation line large foreign market technology separation line small foreign market ki random k variable

c
k1 0 k2

Result 2: firms if firms have identical marketin largein large if have identical market share share foreign 2: country country , they must have

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3
ci

Open economy equilibrium

country ci

Emami Namini/Lpez
small foreign country

3.2 Market share and export random random behavior large foreign (2) variable variable
c
isorevenue curve high tech

technology separation line

iso revenue curve low tech firm 1

firm 1

c
0

firm 2

c
k ki 0

Result 3: large forgein country: market share firm 1 2 > market share firm 2 1 small foreign country: market share firm 2 > 19 of 20 market share firm 1

random variable

firm 2 technology separation line

random variable

ki

Conclusions

Emami Namini/Lpez

actual export behavior of firms more complex than predicted by Meltiz (2003) and others:

less productive firms may export to smaller market # of export destinations not related to productivity ranking of firms w.r.t. market shares differs between MC i = k theoretical countries i + (c i + ak ) i2 setup: so far: theoretical results in line with new empirical evidence on firms export behavior
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