Location costs, product quality and implicit franchise contracts

Abstract

In the literature on international trade, very little attention has been given to informational asymmetries between firms and consumers with respect to product quality.The few economic models that analyze the question of how asymmetric information about product quality might affect trade flows treat product quality as exogenous. In contrast, our model takes product quality as an endogenous variable, i.e. firms can choose the quality they wish to produce. In this case, location costs can signal product quality under certain conditions and thereby affect international trade flows. More specifically, intra-industry trade in vertical differentiated experience goods can be determined by information asymmetries about product quality. * We would like to thank Andrzej Cieoelik, James Dunlevy, Jess Gaspar, Michel Ghertman, Eckhard Janeba, Daniel Klein, Bertrand Quélin, Stephan Panther, Rudolf Richter, Dieter Schmidtchen, Ilya Segal, Udo Schmidt-Mohr, Deepak Somaya, Willy Spanjers, Mirja Weiss, and seminar participants at UC Berkeley, the 1997 Meeting of the European Economic Association in Toulouse, the 1997 Meeting of the Verein für Socialpolitik in Berne, and the 1998 Meeting of the American Economic Association in Chicago for useful discussion and comments on this work. This paper was almost completely rewritten while Justus Haucap was a visiting scholar at the Institute of Management, Innovation, and Organization (IMIO) at the Haas School of Business, University of California, Berkeley, the hospitality of which is most gratefully acknowledged. Moreover, Justus Haucap is grateful for financial support from the Deutsche Forschungsgemeinschaft (DFG) under grant Ri 15-2. Christian Wey acknowledges financial support from the Rainer Horstmann Fellowship at Indiana University, Bloomington. This research was also financially supported by the BMW AG. ZUSAMMENFASSUNG Standortkosten, Produktqualität und implizite FranchiseverträgeIn der internationalen Handelstheorie ist der Tatsache

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