International trade, product lines and welfare: The roles of firm and consumer heterogeneity

Abstract

A central prediction of international trade models is that increased integration leads to specialization. This mechanism has been used to gain insight into the location of industries across countries, the reallocation of output across firms as well as the variation of a firm's product range as countries liberalize. Nevertheless, the notion that international trade will lead firms to rationalize their product portfolios and concentrate on their “best” products doesn't always square with reality. In particular, firms in prominent industries have, on occasion, extended their offerings to include a lower quality version/option as international competition increases – expanding rather than contra..