Technology, Preference for Quality, and Vertical Intra-Industry Trade

Abstract

This paper provides a simple theoretical model to investigate determinants of the vertical IIT based on Bertrand price competition. We find that the volume of trade is higher among countries where R&D investments are larger. In addition, the vertical IIT share increases with the similarity between two countries in terms of technology and per-capita income. Our theoretical findings are consistent with recent empirical findings

Determinants of Intra-Industry Trade in Agricultural and Food Products Between Poland and EU Countries

“…This interpretation refers to the concept of similarity of preferences created by Linder (1961), according to which the intensity and structure of trade largely depends on the degree of similarity between countries. GDP per capita can also be interpreted from the supply side, as an approximation of the proportion of productive factors in the economy (see, for instance, Clark and Stanley, 1999;Niem and Kim, 2010). Countries similarly equipped in capital and labour have similar opportunities to develop the processing industry that manufactures the differentiated products subject to intra-industry trade.…”

Evolving sophistication of trade patterns in a transition economy - machinery exports of Poland 1980-2009

“…More recently, Kim and Niem [2011] study the impact of preference diversity and relative country size on intra-industry trade (IIT) in an industry with a vertically differentiated product. Niem and Kim [2010] provide a simple theoretical model to investigate determinants of the vertical IIT based on Bertrand price competition. Lim [2011] asks the question, when fragmentation increases intra-industry trade (IIT) in interregional trade, do we expect to see the increasing roles of interregional trade toward the equilibrium condition in regional labor markets?…”