Location costs, product quality, and implicit franchise contracts

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