DEPOCEN Working Paper Series
LE DUC NIEM, 2014. "Why Do Similar Countries Trade with Each Other for the Same Good?"
In this paper, we construct a simple model to show why similar countries can trade with each other for the same good when product quality can be selected by firms. Specifically, we devise a model that shows when trade expands a market, firms will build higher quality into their goods that benefits the whole region. We find that trade does not increase the variety of goods and makes goods more costly due to their higher quality. Therefore, we conclude quality improvement is the main mechanism that helps countries gain from trade in quality differentiated goods.
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