A Simple Model of Quantity Heterogeneity andInternational Trade

This paper develops a trade model with firm-specific quality heterogeneity, limit pric-ing, and an endogenous distribution of markups. Exposure to trade induces only thefirms producing high-quality (high-price) products to enter the export markets, whereasfirms producing low-quality (low-price) products serve the domestic market in accor-dance to the Alchian and Allen (1964) conjecture. Trade liberalization intensifes thecompetition; causes firms producing low-quality products to exit the market; increasesthe number of products consumed in each country; raises national and global welfare;and generates quality upgrading that results in higher and average domestic and exportmarkups. Interestingly, the laissez-faire equilibrium is ineffcient, and this leaves roomfor welfare-improving government intervention....