A Theory on the Role of Wholesalers in International Trade based on Economies of Scope

Intermediaries and wholesalers play an important role in international trade. This paper develops a model of international trade with heterogeneous firms that offers an explanation of the existence of wholesalers. All exporting firms have to pay a fixed cost of establishing a distribution network in the foreign market. However, wholesalers possess a technology different to normal manufacturing firms: they can buy manufacturing goods domestically and sell in foreign markets and handle more than one good. A wholesaler therefore faces an additional fixed cost which is convex and monotonically increasing in the number of goods it ships. The entry of wholesale firms leads to productivity sorting. The most productive firms export on their own, as in the standard model, by paying a fixed cost to do so, while the least productive firms do not export. However, a range of firms with intermediate productivity levels export through international wholesalers. The existence of wholesale firms increases total exports and the number of firms that export. Moreover, a higher fixed cost of exporting leads to (i) a higher share of exported goods that is distributed by wholesalers, and (ii) a higher share of total exports that is distributed by wholesalers. The higher the fixed cost of exporting, the more important is the role of wholesalers since these can spread the fixed cost across more than one good. The wholesale technology therefore exhibits economies of scope. Finally, a larger fixed cost of exporting increases the scope of each wholesaler firm.