Emami Namini/López Julian Emami Namini Erasmus University Rotterdam IU Microeconomics Workshop, 09 January 2008 Ricardo A. López Indiana University, Bloomington International trade with horizontal and vertical product differentiation and heterogeneous firms 1 of 20

Emami Namini/López 1Introduction 1. Melitz (2003), Econometrica exporters more productive than non–exporters 1.1Theoretical literature on firms‘ export behavior 2. Eaton/Kortum/Kramarz (2005), Working Paper symmetric countries: exporters export to each country hierarchy of markets implicitly: asymmetric countries: only more productive firms export to smaller market — more productive firms export to more markets 2 of 20

Emami Namini/López 4. Raff/Stähler/VanLong (2007), Working Paper R & D–decision by firms productivity gains with exposure to trade: more R & D by exporting firms implicitly: 1Introduction 3. Bekkers (2007), Working Paper exporting firms:higher quality & higher price identical quality for each destination market 1.1Theoretical literature on firms‘ export behavior – ctd. implicitly: asymmetric countries: only higher quality firms export to smaller market asymmetric countries: only higher productivity firms export to smaller market 3 of 20

Emami Namini/López This paper 1.on average: productivity exporters > productivity non–exporters 1.2Empirical literature on firms‘ export behavior / Lawless (2007), Working Paper = Melitz (2003) 1Introduction data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990– of 20

Emami Namini/López This paper 1.2Empirical literature on firms‘ export behavior – ctd. / Lawless (2007), Working Paper – ctd. ≠ Melitz (2003) 1Introduction 2.however: ‘many’ non–exporters more productive than exporters 5 of 20 data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999

Emami Namini/López data source: Annual National Industrial Survey, National Institute of Statistics, Chile; 1990–1999 This paper 1.2Empirical literature on firms‘ export behavior – ctd. / Lawless (2007), Working Paper – ctd. ≠ Melitz (2003) 1Introduction 3.# of export destinations: ‘many’ firms export to limited number of countries 6 of 20

Emami Namini/López This paper 1.2Empirical literature on firms‘ export behavior – ctd. / Lawless (2007), Working Paper – ctd. ≠ Melitz (2003) 1Introduction 4.market 1 & market 2: market share firm 1 > (<) market share firm 2 5.less productive firms may export to smaller market ≠ Melitz (2003) 1.3Theoretical contribution of this paper Theoretical model to explain additional empirical evidence on export behavior 7 of 20

Emami Namini/López 2This model — preliminaries 2.1Households CES utility function over N varieties of differentiated good only labor, numéraire good 8 of 20  = 2 – for simplicity firm index 2.2Countries countries differ in size quality level of firm  # goods?Partial equilibrium setup; analyzed sector:IRS: fixed costs

Emami Namini/López high (low) tech  high (low) fixed costs decision for each market: high / low tech Dixit–Stiglitz monopolistic competition between firms 2This model — preliminaries 2.3Firms serving domestic/foreign market:fixed costs 9 of 20 ex–ante uncertainty about MC: 1. market entry – sunk costs – technology unknown 2. draw of technology parameters

Emami Namini/López 2This model — preliminaries 2.3Firms — ctd. per unit costs: random variables choice variable — ‘some’ influence on technologies; high / low tech: a H < a L choice variable: quality level variable profits profit maximizing quality level: 10 of 20 k MC for zero quality output c MC for each unit quality

Emami Namini/López profit maximizing price level: 2This model — preliminaries 2.3Firms — ctd. profit maximizing quality level: cc identical p  quality  market share  kk p   quality  market share  11 of 20 random variable demand:

Emami Namini/López 2This model — preliminaries 2.3Firms — ctd. a H / a L ? High / low tech? Assumption: & firm chooses high tech if high tech profits > low tech profits high tech low tech technology separation line – country specific 12 of 20

Emami Namini/López 2This model — preliminaries 2.3Firms — ctd. iso–revenue curves? high tech: low tech: iso–revenue curve low tech iso–revenue curve high tech 13 of 20

Emami Namini/López 2This model — preliminaries 2.4Course of events 14 of 20 time market entry — sunk costs f E draw of random variables c & k decision: production & technologydecision: market exit productionrandom shock: market exit

Emami Namini/López 2This model — preliminaries 2.4Success of market entry 15 of 20 random variable variable profits  : variable profits  production after entry only if variable profitsfixed costs ≥ zero profit condition low tech high tech zero profit condition exit production

Emami Namini/López random variable 3Open economy equilibrium 3.1Productivity and export behavior (1) zero profit condition — domestic market technology separation line — both markets Ø non–exporting firm zero profit condition — foreign market Result 1: 16 of 20 per unit costs Ø exporting firm Ø exporting firm < per unit costs Ø non – exporting firm

Emami Namini/López, but only firm 2 exports to small foreign market. random variable 3Open economy equilibrium 3.1Productivity and export behavior (2) zero profit condition — large foreign market technology separation line — large foreign market firm 1 firm 2 zero profit condition — small foreign market Result 1: p  17 of 20 firm 1 has lower per unit costs (  higher productivity) technology separation line — small foreign market

Emami Namini/López Result 2: if firms have identical market share in large country, they must have identical export behavior w.r.t. small foreign country! if firms have identical market share in large foreign country 3Open economy equilibrium 3.2Market share and export behavior (1) zero profit condition — large foreign market technology separation line — large foreign market firm 1 firm 2 zero profit condition — small foreign market Result 2: iso–revenue curve large foreign market iso–revenue curve small/large foreign market random variable technology separation line — small foreign market 18 of 20

Emami Namini/López Result 3: large forgein country:market share firm 2 > market share firm 1 small foreign country:market share firm 2 > market share firm 1 Result 3: large forgein country:market share firm 1 > market share firm 2 3Open economy equilibrium 3.2Market share and export behavior (2) firm 1 firm 2 Result 3: firm 1 firm 2 large foreign country small foreign country technology separation line iso–revenue curve high tech iso–revenue curve low tech random variable 19 of 20

Emami Namini/López 4Conclusions actual export behavior of firms more complex than predicted by Meltiz (2003) and others: theoretical setup: ranking of firms w.r.t. market shares differs between countries  of export destinations not related to productivity less productive firms may export to smaller market so far: theoretical results in line with new empirical evidence on firms‘ export behavior 20 of 20