Location Costs, Product Quality,and Implicit Franchise Contracts

In the literature on international trade, very little attention has been given toinformational asymmetries between firms and consumers with respect to product quality.The few economic models that analyze the question of how asymmetric informationabout product quality might affect trade flows treat product quality as exogenous. Incontrast, our model takes product quality as an endogenous variable, i.e. firms canchoose the quality they wish to produce. In this case, location costs can signal productquality under certain conditions and thereby affect international trade flows. Morespecifically, intra-industry trade in vertical differentiated experience goods can bedetermined by information asymmetries about product quality.