Multiproduct oligopoly and trade between asymmetric countries

• DOI: http://doi.org/10.1111/roie.12311
• Published date: 01 August 2018
• Date: 01 August 2018

SPECIAL ISSUE PAPER

Multiproduct oligopoly and trade between

asymmetric countries

Yi-Ling Cheng

1

|

Takatoshi Tabuchi

2

1

National Sun Yat-sen University, Taiwan

2

University of Tokyo, Japan

Correspondence

Takatoshi Tabuchi, Faculty of

Economics, University of Tokyo,

Hongo-7-3-1, Bunkyo-ku, Tokyo

113-0033, Japan.

Email: ttabuchi@e.u-tokyo.ac.jp

Abstract

This paper develops a general equilibrium model of oligopo-

listic multiproduct firms conducting trade between

asymmetric countries, in which heterogeneous entrants

choose their product ranges and outputs. We show that there

are fewer exporters in the larger country, and each produces

a wider range of products but exports fewer varieties. We

also show that while trade liberalization increases the total

number of consumed varieties, it decreases the total number

of firms and may reduce the product range of each firm.

1

|

INTRODUCTION

Multiproduct firms abound in the real world. Bernard, Redding and Schott (2010) show that about 39

percent of U.S. manufacturing firms produce more than one product, and their production accounts for

87 percent of total sales. According to international trade data, the majority of export sales originate

from multiproduct firms. Bernard, Jensen and Schott (2009) indicate that over 10 percent of exporters

and 20 percent of importers trade more than 10 products and that the sales of these firms account for

about 90 percent of the export and import value in 2000. In spite of their dominant presence, multi-

product firms have received little attention in the theory of international trade and economic geography.

Few studies analyze the production, product scope and export of multiproduct firms, which are affected

by globalization and trade liberalization.

General equilibrium models of international trade often confine themselves to single-product firms

in the literature. The product scope of firms is generally not considered, and the product variety is

assumed to be equal to the number of firms in the economy. In contrast, multiproduct firms are well

studied in the field of industrial organization, for example, by Johnson and Myatt (2006), Peng and

Tabuchi (2007), and Ottaviano and Thisse (2011). However, theses studies often focus on partial equi-

librium, so that general equilibrium feedback through the interactions of different markets is neglected.

Therefore, it is important to explore interactions across industries in a framework of multiproduct firms

in the global economy.

Multiproduct firms also figure prominently in the literature on international trade (e.g., refer to

Bernard, Redding & Schott, 2011; Dhingra, 2013; Mayer, Melitz & Ottaviano, 2014). These studies

normally assume monopolistic competition between multiproduct firms, so that each firm has no

524

|

V

C2017 JohnWiley & Sons Ltd wileyonlinelibrary.com/journal/roie Rev IntEcon. 2018;2 6:524–538.

DOI: 10.1111/roie.12311