INTRAINDUSTRY TRADE UNDER VERTICAL PRODUCT DIFFERENTIATION

The paper focuses on trade between two countries where a vertically differentiated commodity is produced by a single firm in each country, operating initially in autarkic conditions. It is assumed that the two countries have overlapping income distributions, giving thus rise, under certain conditions, to two-way trade, I.e., a proper intraindustry trade. It emerges that while consumers always benefit from trade, especially if two-way trade arises, firms may have conflicting preferences on the choice between (I) autarky and trade, as well as (ii) one-way trade and two-way trade.
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