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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 33, No. 2, pp.99-119
ISSN: 1225-0279 (Print)
Print publication date 30 May 2020
Received 04 Jan 2020 Revised 11 Mar 2020 Accepted 19 Mar 2020
DOI: https://doi.org/10.22905/sje2020.33.2.001

Trade of Vertically Differentiated Products, Quality Improvement, and Welfare

Le Duc Niem ; Taegi Kim
Le Duc Niem, Department of Economics, Tay Nguyen University, 567 Le Duan Buon Ma Thuot, Dak Lak, Vietnam, Tel: +84-96-406-1111, Fax: +84-26-2382-5184 leniem@gmail.com
Taegi Kim, Corresponding Author, Department of Economics, Chonnam National University, 77 Yongbong-ro, Buk-gu, Gwangju, 61186, South Korea, Tel: +82-62-530-1455, Fax: +82-62-530-1549 tgkim@jnu.ac.kr

JEL Classification: F12, L13

Abstract

This paper constructs a simple model to explain how trade in vertically differentiated products affects the welfare of the trading countries when product quality can be selected by firms. We specifically devise a model showing that when trade expands a market, firms will intensively invest in R&D activities to build higher quality into their goods and thus benefit the entire region. We find that trade does not increase the variety of goods but increases their cost due to their higher quality. We conclude that quality improvement is the main mechanism that helps countries gain from trade in vertically differentiated goods.

Keywords:

Product quality, Variety of goods, Vertical intra-industry trade, Welfare

Acknowledgments

This research is funded by Vietnam National Foundation for Science and Technology Development (NAFOSTED) under grant number 502.01-2019.330.

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