Speaker: Gene M. Grossman, Princeton University (Joint with Pablo Fajgelbaum, Princeton University and Elhanan Helpman, Harvard University)
Abstract: We develop a framework for studying trade in horizontally and vertically differentiated products. In our model, consumers have heterogeneous incomes and heterogeneous tastes. They purchase a homogeneous good as well as making a discrete choice of quality and brand of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade - which is driven primarily by demand factors - derives from "home market effects" in the presence of transport costs. When these costs are suffciently small, goods of a given quality are produced in a single country. The model provides a tractable framework for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.