DP10852 What Drives Home Market Advantage?

Author(s): Kerem Cosar, Paul L. E. Grieco, Shengyu Li, Felix Tintelnot
Publication Date: September 2015
Keyword(s): automobile industry, market segmentation, trade and foreign direct investment
JEL(s): F1, L1
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10852

In the automobile industry, as in many tradable goods markets, firms usually earn their highest market share within their domestic market. The goal of this paper is to disentangle the supply- and demand-driven sources of the home market advantage. While trade costs, foreign production costs, and taste heterogeneity all matter for market outcomes, we find that a preference for home brands is the single most important driver of home market advantage - even after controlling for brand histories and dealer networks. Furthermore, we also find that consumers favor domestically producing brands regardless of the historical brand origin.