DP1106 On the Persistence of Leadership or Leapfrogging in International Trade

Author(s): Antonio Cabrales, Massimo Motta, Jacques-François Thisse
Publication Date: January 1995
Keyword(s): Country Asymmetries Integrated Markets, Equilibrium Selection, International Trade, Product Differentiation, Segmented Markets
JEL(s): F12, F15, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1106

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).