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Sub-national Differentiation and the Role of the Firm in Optimal International Pricing

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  • Edward J. Balistreri
  • James R. Markusen

Abstract

We illuminate the relationship between optimal firm pricing and optimal trade policy by exploring a generalized model that accommodates product differentiation at both the national and sub-national (firm) levels. We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their terms of trade through trade distortions, because firms play an important preemptive role in optimally pricing unique varieties. We contrast this with standard applications of perfect-competition Armington models, which exhibit high optimal tariffs--even for relatively small countries.

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  • Edward J. Balistreri & James R. Markusen, 2007. "Sub-national Differentiation and the Role of the Firm in Optimal International Pricing," NBER Working Papers 13130, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13130
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    JEL classification:

    • F1 - International Economics - - Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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