Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89190
Authors: 
Bastos, Paulo
Straume, Odd Rune
Year of Publication: 
2010
Series/Report no.: 
IDB Working Paper Series IDB-WP-184
Abstract: 
This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is consistent with panel data on Chilean manufacturing plants.
Subjects: 
Trade liberalization
Product differentiation
Innovation
Wage inequality
General oligopolistic equilibrium
JEL: 
F15
F16
L13
O31
Document Type: 
Working Paper

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