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Product Differentiation, Competition, and International Trade

Daniel M. Bernhofen
The Canadian Journal of Economics / Revue canadienne d'Economique
Vol. 34, No. 4 (Nov., 2001), pp. 1010-1023
Published by: Wiley on behalf of the Canadian Economics Association
Stable URL: http://www.jstor.org/stable/3131935
Page Count: 14
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Product Differentiation, Competition, and International Trade
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Abstract

In this paper the two workhorse theories of international trade under imperfect competition - Krugman's taste for variety model and Brander's strategic intra-industry trade model - are integrated into a single analytical framework. A quadratic utility function allows for a nesting of these two theories by postulating a consumer taste for variety over differentiated products, where the extent of product differentiation is linked to the intensity of strategic interaction among firms. The model yields intuitive predictions on the effects of the degree of product differentiation on the volume of trade and on the composition of the gains from trade under imperfect competition. JEL classification: F12

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