DP16278 A Simple Model of Buyer-Seller Networks in International Trade

Author(s): Philipp Herkenhoff, Sebastian Krautheim, Philip Sauré
Publication Date: June 2021
Date Revised: July 2021
Keyword(s): buyer-seller, firm-to-firm, network, random matching, Trade
JEL(s): F10, F12, F14
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16278

The recent literature on firm-to-firm trade has documented salient empirical regularities of the buyer-seller network. We propose a simplistic re-interpretation of the classical Krugman (1980) model that accounts for surprisingly many of the empirical regularities. This re-interpretation relies on randomized bundling of Krugman-varieties into heterogeneous firms, economically neutral `sales units' that import foreign varieties but belong to local firms, and a statistical reporting threshold that applies to firm-to-firm transactions. We argue that our model provides an important benchmark for the assessment of theoretical models that aim to identify the determinants of firm-to-firm networks.