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PRODUCT DIFFERENTIATION

Introduction

We have seen earlier how pure external IRS can lead to intraindustry trade. Now we see how product dierentiation can

provide a basis for trade due to consumers valuing variety.

When trade occurs due to product dierentiation, even identical countries will trade by exchanging dierent varieties of the

same good. The value consumers place on variety generates

another source of gains from trade. IRS due to a xed cost

of producing each variety limits the number of varieties produced by a country. Two key versions of modeling preferences

for the dierentiated products are the love of variety approach

and the ideal variety (bliss point or spatial) approach. Both

provide a subutility function that increases in the number of

varieties available, but the love of variety approach is easier to

employ.

The CES utility function has proved very useful in models of

product dierentiation. The typical form of modeling preferences is to assume an upper-tiered utility function

u(x0 , V ) = U (x0 , V (x1 , ..., xn ))

(5.1)

x1 , ..., xn are consumptions of n dierentiated goods, and V is a

sub-utility function for a set of dierentiated products. Utility

is separable between the set of dierentiated goods and the

numeraire. Apply a two stage budgeting procedure to allocate

PRODUCT DIFFERENTIATION

set of dierentiated products and the numeraire.

We assume that preferences are homothetic between the

numeraire good x0 and the set of dierentiated goods x1 . . . xn

so consumers spend a xed share of their income on the two

categories of goods. Suppose the upper tier utility function is

Cobb-Douglas in the numeraire good and the set of dierentiated goods

u(x0 , V ) = x0 V 1

(5.2)

so the elasticity of substitution between the dierentiated goods

and the numeraire good equals one. Normalizing the price of the

numeraire good to one p0 = 1, the consumers budget constraint

sets expenditure equal to income

x0 +

n

X

pi x i = I

(5.3)

i=1

the numeraire good. When preferences are homothetic, the

consumer spends a xed proportion of income I on the two

P

set of goods: x0 = I on the numeraire good and ni=1 pi xi =

(1 )I on all the dierentiated goods. Let

E I x0 = (1 )I

(5.4)

budget constraint for spending on dierentiated goods, given

E, is

n

X

pi x i = E

(5.5)

i=1

Love of Variety

Suppose the sub-utility function is a symmetrical CES function

!1

V =

n

X

xi

, <1

(5.6)

i=1

Every pair of varieties is equally substitutable:

=

1

1

> 1 = 1

1

(5.7)

consumption of the goods.

2

PRODUCT DIFFERENTIATION

same price p. Then the consumer buys equal amounts of

all goods. Subutility can be written as

V =

xi

"

E

= n

np

! # 1

!1

= (nx )

= n

(5.8)

1

E

E

= n 1

np

p

V

=

n

1

1 nV > 0

(5.9)

dierentiated goods may be represented by a continuum, so the

sum is then replaced by an integral in the subutility function,

V =

xi di

(5.10)

which can be more convenient. The goal is to maximize subutility V subject to the budget constraint

Z

(5.11)

pi xi di = E

rst stage), the consumers problem becomes

max

xi di

+ E

pi xi di

(5.12)

1

1 1

xi di

x1

pi = 0

i

(5.13)

1

1 1

xi di

x1

pj = 0

j

(5.14)

"

xi

pj

=

xj

pi

PRODUCT DIFFERENTIATION

1

1

"

pj

=

pi

(5.15)

pj

xi

p i = pj

=1

= 1 xi = xj

(5.16)

pi

xj

For a CES utility function, the elasticity of substitution be1

tween two dierent varieties is = 1

. Using demand functions,

Z n

Z n

xj p1

p

di

=

x

p

p1

di

(5.17)

E=

j j

i

j

i

0

implies

Ep

Ep 1

j

xj = R n 1

= R j

n

1

di

0 pi

di

0 pi

(5.18)

An individual rm views 0n p1

di as xed and thus faces a

i

constant elasticity demand curve

xj = kp

j

(5.19)

where

E

(5.20)

1

di

0 pi

with demand elasticity equal to the elasticity of substitution

between a pair of the dierentiated goods.

Each rm chooses the price of its variety to maximize its

prots, taking as given the price charged by other rms. Assume that every variety is produced with the same production

function. Focus on a representative rm (producing a unique

variety), whose problem is to pick its price to maximize its

prots

= px C (x)

(5.21)

k Rn

Suppose the cost function takes the forms of a xed cost plus

a constant marginal cost

C (x) = b + cx

(5.22)

= (p c) x b = (p c) kp b

(5.23)

1

p 1

=c

c

p=

1 1

4

(5.24)

(5.25)

PRODUCT DIFFERENTIATION

and lim p = c. With all varieties priced equally, the budget constraint nxp = E implies that consumers evenly spread

consumption over all available varieties

x=

E

np

(5.26)

varieties available.

E

(5.27)

n=

b

The measure of varieties available decreases in the elasticity

and the xed cost of variety b

n

E n

E

= 2,

= 2

b b

b

(5.28)

Krugmans model gives an explanation for the trade between

countries with similar (even identical) factor endowments (same

technology and tastes too) that illustrates how having a large

domestic market operates as a source of comparative advantage

(export goods for which have a larger domestic market than

other goods relative to ROW). The model is derived from the

famous Dixit and Stiglitz (1977) model of monopolistic competition (horizontal product dierentiation).

Consumers

A large number of potential goods enter symmetrically into

utility according to the utility function

U=

n

X

ci , 0 < < 1

(5.29)

i=1

where ci is consumption of good i. Utility exhibits love of variety. Preferences exhibit a constant elasticity of substitution

between any two goods. Consumers choose their consumptions

PRODUCT DIFFERENTIATION

n

X

pi ci = I

i=1

solve

!

n

n

X

X

max

ci + I

pi ci

c

i

i=1

i=1

where is the shadow price on the budget constraint (the marginal utility of income). The rst order conditions (FOC) are

c1

pi = 0, i = 1, . . . , n

i

(5.30)

pi =

1

c

i

(5.31)

good equals production of each good per consumer

ci =

xi

L

(5.32)

consumer has one unit of labor supply). Substituting for ci , we

get the market demand function for good i

xi

pi =

L

(5.33)

1

Firms face a CES demand function with elasticity 1

. No

strategic interdependence among rms as the number of available varieties is assumed to be large. Each good i will be produced by only one rm: all rms dierentiate their product

from all products oered by other rms.

Producers

Suppose there is only one factor, labor. Let the cost function for each good be given by

li = + xi , > 0, > 0

(5.34)

gives the xed cost and the marginal cost (in terms of labor).

Hence have IRS internal to the rm: average cost declines with

6

PRODUCT DIFFERENTIATION

xi to maximize its prots

i = pi xi wli

(5.35)

function (5.33) for pi and the cost function (5.34) for li , the

rm picks its output xi to maximize its prots

x 1 1

w( + xi )

i = i

L

The rst order conditions are

2!

1

1

i

=

x1

w = 0, i = 1, . . . , n

i

xi

(5.36)

(5.37)

xi 1 w

(5.38)

=

L

so the FOC implies

w

(5.39)

p = pi =

xed mark up over marginal cost reecting the substitutability

of varieties. Clearly, the price increases with the marginal cost

parameter and decreases with

w

p

w

p

= > 0,

= 2 <0

(5.40)

1

i = (p w) xi w =

1 xi w

(5.41)

xi gives

=

(5.42)

(1 )

Equilibrium output increases in the xed cost of variety and

but decreases in the marginal cost parameter

x

x

=

> 0,

=

= 2

> 0,

<0

2

(1 )

(1 )

(1 )

(5.43)

Equilibrium output is constant across goods and independent

of the resources in the economy. An increase in resources L

increases only the number of varieties n that are produced (see

below), not the output of each variety x.

x = xi =

p

w

PRODUCT DIFFERENTIATION

Full Employment

supply L

n

1

(5.44)

L(1 )

L

=

+ x

(5.45)

L = n( + x) =

the full employment condition for n gives

n=

The above equations provide a complete description of the autarkic equilibrium in an economy. As resources L increase, the

number of available varieties n increases.

dn

1

=

>0

dL

(5.46)

L

dn

= <0

d

(5.47)

dn

L (1 )

=

<0

d

2

(5.48)

imperfect substitutability of goods < 1.

International

Trade

Assume two countries (alike in every way except size) engage in free trade (with zero transportation costs). What does

trade do? Fixed costs in the production of each good create an

incentive to concentrate production within a rm. Increasing

returns to scale imply that concentration is ecient so that two

identical countries will specialize in the production of dierent sets of goods and intraindustry trade will occur in similar

but dierentiated products. Gains from trade stem from the

increased diversity of goods available under free trade due to

market expansion. Full employment determines the varieties

produced in each country under free trade

n=

8

L

L(1 )

=

+ x

(5.49)

PRODUCT DIFFERENTIATION

n =

L (1 )

L

=

+ x

trade as under autarky. However, under free trade, consumers

can consume all n + n varieties. Since consumers love variety, they gain from trade. The simplifying assumptions of this

model imply that free trade does not alter the prices charged

by rms or their output levels. Under free trade, consumers

solve the same problem but now distribute their expenditures

over n + n goods so that they enjoy greater variety.

Results

1. Both countries gain from trade because of increased diversity of goods. To see the gains from trade, compare

(domestic) utility under autarky

"

w

w

=n

UA =

np

np

(1 )

=n

(5.50)

1

UT = (n + n )

(1 )

(5.51)

n + n

UT

UR

=

UA

n

n

= 1+

n

>1

(5.52)

n > 0 due to L > 0 and < 1. Furthermore, the gains

from trade decrease with as the goods become closer

substitutes so variety is less important

n + n

dUR

=

d

n

ln

n + n

n

<0

(5.53)

role of the goods being dierentiated

lim UR = 1, lim UR = 1 +

n

n

(5.54)

Gains from trade vanish as goods become perfect substitutes (lose love of variety).

PRODUCT DIFFERENTIATION

2. Direction of trade is indeterminate, but nothing important depends on which country produces (and thus exports) which good as the goods are symmetric. Of the

n + n goods consumed, n are imported by the home

country. The value of home country imports measured

in wage units equals value of foreign country imports, so

trade is balanced. Thus, the volume of trade is determinate.

3. One peculiarity of the model is that the output of each

good remains the same even under trade. Krugman (JIE

1979) develops a more general (but more tedious) model

where the scale of production of each variety does increase

with trade.

4. When there are transportation costs, bigger country has

the higher wage. Iceberg type transportation costs are

assumed: when send one unit of any good abroad, only

g 1 arrives as the rest melts on the way. The higher

wage in the bigger country gives a production cost advantage in the smaller country to oset the higher total

transportation costs paid to reach consumers.

5. Transportation costs lead to the home market eect

countries export those products for which they have bigger markets at home.

The added complication in this paper comes solely from a more

general utility function. Generality eliminates the no scale effects aspect of Krugman (AER 1980) recall output and price

as well as real wage did not respond to trade in that model. In

fact, trade is nothing but an expansion in the market size in

that model.

Consumers

Assume a general utility function

u=

v(ci )

10

PRODUCT DIFFERENTIATION

i =

v0

i

and assume that

<0

00

v ci

ci

facing a producer. To do this note, that the FOC for consumer

optimization is

v 0 (ci ) = pi

(5.55)

v 00 (ci )dci = dpi

This implies

v00 (ci )

dci 1

dpi 1

=

ci pi

pi ci

which gives

dci /ci

pi

v 0 (ci )

= 00

= 00

dpi /pi

v (ci )ci

v (ci )ci

Since all consumers are identical, cL = xi . This along with

(5.55) gives

1 xi

pi = v 0 ( )

L

Producers

Cost function for a producer

li = + xi

A producer solves

max pi xi wli =

1 0 xi

v ( )xi w( + xi )

L

1

p 1

= w

w

1

Note that depends upon ci so in the above equation price still

depends upon an endogenous variable. Therefore, we need to

use the free entry zero prot condition in conjunction with the

p=

PRODUCT DIFFERENTIATION

11

equation denes the PP curve. This curve is upward sloping

because () decreases in c and decreases faster than 1.

From zero prots, we have

px = ( + x) w

This implies

p

=+ =+

w

x

cL

This denes the ZZ curve. Equilibrium price and quantity are

determined by the intersection of the two curves. Finally, the

equilibrium number of products is given by

n=

L

L

=

+ x

+ cL

Results

1. Eects of an increase in L: As L increases, the PP curve

is unaected but the ZZ curve shifts to the left. Thus,

both p/w and c fall. This implies n increases. Also, since

p/w falls, x also increases. Thus, with an increase in the

labor force, price to wage ratio falls (real wage increases),

output of each good increases, and the number of goods

produced increases. Conceptually, some of the increased

labor goes to increased output while some of it goes to

the production of more varieties, this is why per capita

consumption of each good falls not all of the increase

in L goes toward increasing x.

2. Trade: Very much like the rst model. Expansion in

the number of varieties for each consumer, also increased

output and lower prices. Welfare gains.

3. Factor Mobility: The bigger country will have a higher

real wage. Incentive to migrate from the small country

to the big.

This third paper builds on the rst two papers. Its main contribution is to provide a model in which trade occurs both within

12

PRODUCT DIFFERENTIATION

an industry as well as cross industries (intra- and inter- industry). In addition, it gives the realistic prediction that the

degree of intra-industry trade increases with the similarity of

the two countries factor endowments. The model also makes it

feasible to assess the distributional eects of the two types of

trade.

Model

Two sectors with dierentiated goods

N1

N2

X

X

u = ln

c1i

+ ln

c2j

i

products and if number of products in each industry are large,

1

elasticity of substitution equals 1

.

Two types of labor: each is specic to one industry.

l1i = + x1i

l2j = + x2j

Total labor force equals 2. When we introduce a second country, we will assume that while the two countries dier in their

relative endowment of each kinds of labor, the absolute size of

the total labor stock is the same in each country.

and

l1i = L1 = 2 z

L2 = z

Equilibrium

As before, we have

p1 =

w1 and p2 = w2

x1 = x2 =

and

PRODUCT DIFFERENTIATION

13

n1 =

2z

z

and n2 =

+ x1

+ x2

w1 L1 = w2 L2

This implies

w1

z

=

w2

2z

The model has two key parameters: z and . As z increases,

relative wage in sector 1 increases. is an index of substitutability among intra-industry products as well a measure of

economies of scale: ratio of marginal to average cost. As goes

up, the degree of product dierentiation as well as real wage

increase. Dene

P

|Xk Mk |

I = 1 P

Xk + Mk

Consider two identical countries that are mirror images of

each other except that they dier in their endowments of the

two types of labor.

L1 = 2 z; L2 = z

L1 = z; L2 = 2 z

If z = 1, resources are identical in the two countries. As z

increases, factor proportions diverge: when z = 0, each country

has only one factor.

Under free trade, prices and wages are equalized (note that

w1 = w2 in each country). The zero prot condition gives the

output of each good in terms of parameters. We have

xi = x =

(1 )

As always, full employment condition gives the number of equilibrium products in each country. What can we say about the

volume of trade? Let Y denote the national income in both

countries (Y = wi Li ). Equal factor prices imply equal income.

14

PRODUCT DIFFERENTIATION

home imports in industry i. Then we have

X1 =

Y 2z

Y z

and X2 =

2 z

22

Similarly,

Y (2 z)

z

and M1 = Y

2

2

Substitute the above exports and imports into the Grubel-Loyd

measure of intra-industry trade and we get

M2 =

I =z

This is a striking result! The degree of intra-industry trade

exactly equals the degree of similarity between the factor endowment of the two countries. What can we say about the

welfare consequences of such trade? The basic message is that

distributional consequences are not serious if the countries are

similar enough intra-industry trade is politically more palatable since everyone benets from it.

Individuals split their income equally into the two sectors

and within each sector, consumers buy all goods. Thus we have

U = ln n1

w

2n1 p1

2 ln 2 + ln

! 1

+ ln n2

w

2n2 p2

! 1

w

1

1

w

ln n1 +

ln n2

+ ln +

p1

p2

as well as real wages. Trade increases variety but also causes

FPE. The wage of the abundant factor increases so this factor

is better o due to both eects. However, for the scarce factor

we have

1

2

1 2

z

+

ln

+

ln

2z

2z

z

1

2 2

2 1

ln z ln 2 z +

ln 2

=

U T U A = ln

From the above we can conclude the following. First if < 0.5,

scarce factor also gains. When is small, diversity matters a lot

to the consumer. Second, if > 0.5 and if z > z, both factors

still gain z above a threshold implies sucient similarity in

factor endowments.

PRODUCT DIFFERENTIATION

15

A large proportion of world trade involves exchange of similar

products between industrialized countries but these products

are typically intermediate production goods rather than consumption goods as in Krugmans models. Ethier (1979) argued

that if IRS depend upon the size of the world market (due to

increased specialization of production into small steps which

lead to tradeable intermediate goods), we will derive both an

explanation for intraindustry trade and get rid of the multiplicity problem as well as the possibility of losses from trade

that may arise IRS are external and national in scope. Ethier

(1982) constructs a model in which two kinds of IRS coexist:

one is the usual external IRS (as the number of intermediate

goods expands, nal output increases) and the second is IRS

internal to the rm due to the presence of xed costs involved

in the production of each intermediate good. Unlike rest of the

literature, Ethiers model is a full general equilibrium model

with two goods and two factors of production. Therefore, it

allows us to examine the fate of the traditional HOS theory

in the presence of international IRS. Surprisingly, Ethier nds

that most of the traditional theorems of the HOS model survive

quite well and that (like in Krugmans model), intra-industry

trade too has a factor endowments basis. However, such trade

is shown to be complementary to international factor mobility.

Lastly, while IRS are essential to obtain intra-industry trade,

the degree of IRS is not of much consequence in determining

the magnitude of intra-industry trade.

Model

Two goods: wheat W and manufactures M

Two factors: capital K and labor L

Wheat has CRS technology

Manufactures has IRS. Dene M = km where k is an

index of scale economies and m is the size of operation

in the M industry (how much of the economys K and

L is in M . You can think of m as the output from a

neoclassical production function).

16

PRODUCT DIFFERENTIATION

W and M .

M has two sub-sectors: component production and assembly of nished components.

Each components rm produces one type of input xi using

m as an input. Let n be the (endogenous) number of components produced

m=

mi

mi = b + axi m = nb + a

xi

free entry (so zero prots).

Final Good

All components are assembled through a symmetric CES

production function

M =n

xi

!1

The degree of substitution does not depend upon the level

of usage.

Variety is valued. Suppose n varieties are available at

price q. Then nal producer buys equal amounts of all

components. If x equals the quantity purchased of each

component, then

1

M = n (

x ) = n (nx ) = n x = n1 [nx]

there are IRS in n. These represent the productivity gains

that accrue from an increased division of labor. These

IRS are external to the nal good producer who cannot

control n. M displays CRS with respect to x.

PRODUCT DIFFERENTIATION

17

min

qi xi such that n (

x ) = 1

1

"

n

1 X

xi

i=1

# 1 1

x1

pi = 0

i

n

"

n

1 X

x

i=1 i

# 1 1

xj1 pj = 0

"

xi

qj

=

xj

qi

1

1

Components

We know

xi = xj

"

qj

qi

1

1

producer of component i and that the price of component j is

a markup over marginal cost, where the markup equals .

Total cost in terms of numeraire good W is given by

0

The above cost function implies that any given rm is too small

0

to inuence T (m), the opportunity cost of a small amount of

M in terms of W . Marginal cost for producer i equals

0

Prot maximization requires marginal revenue equal marginal

cost

0

T (m)a

q = qj =

qi = q,

0

i = qx + T (m)(b + ax)

18

PRODUCT DIFFERENTIATION

x=

T (m)b

q + T 0 (m)a

0

x=

T (m)b

T (m)a

+ T 0 (m)a

b

a(1 )

m. Therefore,

m = n(a + bx)

This implies

n=

m(1 )

b

n x = M = km

so that

k=

(1 )

b

!1

1

m

a

and b.

Autarky

Set PW = 1 and let P =

of M requires that

PM

PW

PS M = qnx PS n x = qnx

which gives

PS = qn1

which can be rewritten using values of q and k and n as

0

T (m)

T (m)m

PS =

=

M

k(m)

Note that due to IRS, the supply function is downward sloping.

On the demand side we assume homothetic preferences

U (M, W ) = M W 1

PRODUCT DIFFERENTIATION

19

PD M = (W + PD M )

where equals the fraction of income spent on M and W +

PD M equals total expenditure of consumers. This implies the

demand price equals

PD =

T (m)

1 k(m)m

International

Two economies that dier only in terms of factor endowTrade

(opments. Denote foreign country by asterisks. If both countries

tional)

continue to make both goods, they will specialize in dierent

components. Let nH and nF denote their numbers.

n = nH + nF =

(m + m )(1 )

b

M +M = k(m+m )(m+m ) =

k(m+m )

(1 )

b

}|

!1

(m + m )1 (m+m )

the two countries under free trade. How are m and m and the

relative price determined? Given Cobb-Douglas preferences in

two countries, we have

T (m) + S(m )

PD =

=

1

M +M

1

b

(1 )

!1

T (m) + S(m )

(m + m )

PSH

aT (m)

T (m)

= [(1 )(m + m )/b]1

=

k(m + m )

have

0

T (m)

T (m) + S(m )

=

k(m + m )

1

M + M

in the (m, m ) space. Each point in the (m, m ) space represents a particular allocation of resources in the world economy.

20

PRODUCT DIFFERENTIATION

The HAC indicates for each m the foreign allocation of resources for which the home economy is in equilibrium in world

markets: m and m are on the HAC if the demand price that

clears the world market for the two goods is equal to home

supply price for which the domestic producers are willing to

supply W = T (m) and M = k(m + m )m: their share of

the world output that is required to clear the market for both

goods, given that the foreigners are supplying the rest (S(m )

and M ). Simple calculations show that it is downward sloping. Furthermore, PD < PSH above the curve and vice versa

below it. mo denotes complete specialization points. Similarly,

the Foreign Allocation Curve (FAC) is dened by

0

T (m) + S(m )

S (m )

=

k(m + m )

1 M + M

International equilibrium is given by the intersection of the two

curves.

Intraindustry

Intraindustry trade has a factor endowments basis and it is

Trade

and

complimentary to international factor mobility similarity of

Complemenendowments leads to more intraindustry trade.

tarity

First, both countries specialize in dierent types of components, if they both produce M. Home countrys import and

export of components are given by

MC = nF gx and XC = nH x(1 g)

where g equals domestic national income as a fraction of world

income, i.e.,

g=

PM + W

P (M + M ) + W + W

=1

|XC MC |

XC + MC

which gives

=

2gnF

if nH nF

(1 g)nH + gnF

2(1 g)nH

if nH nF

(1 g)nH + gnF

and

PRODUCT DIFFERENTIATION

21

h denote K/L ratios at home and abroad, where h > h . Consider a small exchange of factors that reduces the gap between

h and h such that incomes remain unchanged as do prices of

goods and commodities (FPE continues to hold). This implies

home will make less components and foreign country will make

more than before. Since Home is K abundant, its share of world

output of components will exceed its share of world income g.

This will imply that will equal the rst formula in which

increases with an increase in nF and a decrease in nH . Maximum intra-industry trade when identical factor endowments

(h = h ). If there were no dierences in factor endowments at

all, all trade would be intraindustry where the two countries

will exchange only components.

and a, b.

How about intraindustry trade? Stare at the expression for , it is unaected by these parameters since such

changes produce osetting changes on the number of components produced in the two countries. Hence, these

parameters play a knife-edge role: their existence is absolutely critical for intraindustry trade but their magnitude does not aect the extent of such trade.

Fate of the

HOS Theory

1. Factor Price Equalization: Assume diversication. From

the equations determining the two allocation curves, it

0

0

must be that S (m ) = T (m). Therefore prices of the

components are equal, regardless of where they are produced so that FPE holds.

2. Rybczynski: Say we change the ratio of capital to labor

but keep the relative price of components constant (T 0

constant). Then while the output of each component remains unchanged (because price has not changed), the

increased m implies that the number of components increases (like increasing labor supply in Krugman AER

1980). Due to external IRS, the output of manufactures

increases.

22

PRODUCT DIFFERENTIATION

3. Stolper Samuelson: The standard result holds with respect to the change in price of components relative to

wheat. But what we care about is manufactures since

thats whats consumed the essence of the StolperSamuelson theorem is its prediction about changes in real

rewards. So what can we say about that? Things are

more complicated here. There are two competing eects

and results depend upon which of the two dominates.

First dene the nominal price of a component

PC = qPW

Note that

PM = n1 PC

which gives

b

PbM = PbC ( 1)n

increases since components are more expensive. However,

a change in relative price alters resource allocation so that

more resources will move into manufactures leading to an

increase in n. Due to the external IRS, an increase in n

essentially lowers the cost of manufactures. This latter

scale eect (captured by the term 1 or the degree

of external IRS) works against the former intersectoral

eect and results depend upon which of these dominates.

If the intersectoral eect dominates, we get conventional

results whereas if the latter dominates we get an antiStolper-Samuelson theorem.

4. Heckscher-Ohlin quantity version remains intact. The

scale eect can alter the price version of the theorem.

PRODUCT DIFFERENTIATION

23

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