Discussion Paper Details

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Title: On the Persistence of Leadership or Leapfrogging in International Trade

Author(s): Antonio Cabrales, Massimo Motta and Jacques-François Thisse

Publication Date: January 1995

Keyword(s): Country Asymmetries Integrated Markets, Equilibrium Selection, International Trade, Product Differentiation and Segmented Markets

Programme Area(s): International Trade and Regional Economics

Abstract: When two countries, starting from different quality levels reflecting different conditions of domestic market demand, open to trade, two possible equilibria arise. In the first, the quality leader maintains its position. In the second, leapfrogging occurs. The latter is possible only if the initial quality gap is not too wide, however. Further, when the risk dominance criterion is used, only the former equilibrium is selected. This result holds for both segmented and integrated markets. Qualities, profits and world welfare are higher when firms can price discriminate (i.e. under segmented markets).

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Bibliographic Reference

Cabrales, A, Motta, M and Thisse, J. 1995. 'On the Persistence of Leadership or Leapfrogging in International Trade'. London, Centre for Economic Policy Research.