Skip to main content
SpringerLink
Log in
Book cover

Trade, Globalization and Development pp 63–79Cite as

A Simple Model of Foreign Brand Penetration with Multi-Product Firms

  • Chapter
  • First Online:

  • 1151 Accesses

Abstract

Trade liberalization through economic integration and decreasing transport and communication costs has resulted in increasing penetration of foreign brands, a phenomenon that has raised concerns among domestic producers. In fact, in the wake of trade liberalization, there has been not only a proliferation of foreign brands, but also a widening of varieties within each imported brand. This chapter addresses both of these phenomena, using a simple model of import penetration with competition among multi-product firms to analyze short run, medium run, and long run effects of decreased trade costs on product diversity (both in brand names and in varieties), relative prices, and relative profits.

Prof. Kikuchi, formerly with the Graduate School of Economics, Kobe University, Kobe, Japan, has since passed away.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    See Bilkey and Nes (1982) for a review of this literature. They reported that both empirical observations and experimental studies indicate that the country-of-origin has a considerable influence on the quality perceptions of a product. Consumers in more developed countries (MDCs) tend to evaluate their own country's products more favorably. Cultural affinity may also play a role in the evaluation of foreign goods. For example, Indian students rated British products higher than did Taiwanese students. Perceived risk seems to have an inverse relationship with level of economic development. Toys made in the E.U. are considered safer than toys imported from less developed countries (LDCs).

  2. 2.

    In our model, we capture the country-of-origin effect by nesting the utility function, such that goods are grouped by country-of-origin, see Eq. (8). We do not assume bias in favor of any product group, though this can be done by simply giving different weights to them in Eq. (8).

  3. 3.

    Matsuyama (1995) considers only single-product firms in each of two industries, and focuses on the distinction between the intra-industry elasticity of substitution and the inter-industry elasticity of substitution. Allanson and Montagna (2005) consider a single industry consisting of multi-product firms, each specializing in a brand and choosing the range of varieties for each brand. Neither paper deals with trade issues.

  4. 4.

    Thus, Eckel (2009) assumes that each retailer sells all products. While Eckel focuses on retailing, one could argue that the concept of intermediation relates to both wholesaling and retailing. In general, wholesalers tend to be more specialized in terms of brands, while retailers tend to offer many brands, though there are exceptions (e.g., specialized retail shops such as Gap, Benetton, L'Occitane, Sony, Apple, Louis Vuitton, as well as specialized car dealers). Our model abstracts from the wholesaler/retailer distinction, and makes the simplifying assumption that each intermediary is the sole distributor of varieties bearing the same brand name.

  5. 5.

    Nevertheless, the response of relative price is monotone: a permanent fall in trade costs by x per cent will lead in the medium run to a fall in the relative price of imported goods by γx per cent, where γ > 1, and the long run fall in relative price is by qγx per cent, where q > 1.

  6. 6.

    Using a different mechanism, Dhingra (2011) finds a similar impact of trade liberalization with product innovation in a multi-product setting. Lorz and Wrede (2009) obtain a somewhat similar type of adjustment (at least in spirit) made by multi-product firms in response to trade liberalization.

  7. 7.

    In an early contribution, Bond (1986) developed a two-sector model in which firms in one sector are heterogeneous due to differences in the level of ability among entrepreneurs. See, also, Schmitt and Yu (2001) and Yu (2002).

  8. 8.

    In what follows, the terms "an entrepreneur" and "one unit of entrepreneurship" are used interchangeably.

  9. 9.

    Note that \( I_{f} \) is an interval, and \( n_{f} \) is the length of that interval. Loosely speaking, the former is a set of elements, and the latter is the measure of the number of elements in that set.

  10. 10.

    Our assumption that consumers have preferences for brands (equivalently here for firms) is borrowed from Allanson and Montagna (2005). An alternative approach would be to follow Bernard et al. (2011) who postulate that preferences are over products (such as shoes, hats etc.) and over varieties, where products are aggregates over varieties, and each multi-product firm produces. Under that approach, consumers do not care about brand names. Our assumption captures the fact that consumers care about brand names. It seems to play an important role for our result on non-monotonicity (Proposition 1).

  11. 11.

    Note that the group price indices \( P_{f} \) and \( P_{h} \) reflect not only the price of individual items but also the range of varieties available to consumers.

  12. 12.

    Recall our assumption that domestic firms in the differentiated good sector do not export.

  13. 13.

    Recall that to supply one unit of the product to the consumer, the firm must ship \( t_{i} \) units.

  14. 14.

    If \( \alpha > \sigma \) (substitutability between two brands is greater than between two varieties within a brand), gross profit of a brand would be convex in the number of varieties within that brand. Then each brand would have an incentive to increase its varieties without limit, an implausible situation.

  15. 15.

    Although the mechanism is different, Dhingra (2011) finds similar impacts of trade liberalization on product/process innovations. See also Lorz and Wrede (2009) for a somewhat similar type of adjustment.

References

  • Allanson, P., & Montagna, C. (2005). Multiproduct firms and market structure: An explorative application to the product life cycle. International Journal of Industrial Organization, 23, 587–597.

    Article  Google Scholar 

  • Antras, P., & Costinot, A. (2011). Intermediated trade. Quarterly Journal of Economics, 126, 1319–1374.

    Article  Google Scholar 

  • Bernard, A. B., Redding, S. J., & Schott, P. K. (2011). Multi-product firms and trade liberalization. Quarterly Journal of Economics, 126, 1271–1318.

    Article  Google Scholar 

  • Bilkey, W. J., & Nes, E. (1982). Country-of-origin effects on product evaluations. Journal of International Business Studies, 13(1), 89–99.

    Article  Google Scholar 

  • Bond, E. (1986). Entrepreneurial ability, income distribution, and international trade. Journal of International Economics, 20, 343–356.

    Article  Google Scholar 

  • Dhingra, S. (2011). Trading away wide brands for cheap brands. Princeton University, Mimeo.

    Google Scholar 

  • Eckel, C. (2009). International trade and retailing. CESifo Working Paper 2597.

    Google Scholar 

  • Feenstra, R. C., & Hanson, G. H. (2004). Intermediaries in entrepot trade: Hong Kong re-exports of Chinese goods. Journal of Economics and Management Strategy, 13, 3–35.

    Article  Google Scholar 

  • Feenstra, R. C., & Ma, H. (2008). Optimal choice of product scope for multiproduct firms under monopolistic competition. In E. Helpman, D. Marin, & T. Verdier (Eds.), The organization of firms in a global economy. Harvard: Harvard University Press.

    Google Scholar 

  • Ju, J. (2003). Oligopolistic competition, technology innovation, and multiproduct firms. Review of International Economics, 11, 346–359.

    Article  Google Scholar 

  • Lorz, O., & Wrede, M. (2009). Trade and variety in a model of endogenous product differentiation. MAGKS WP 02-2009.

    Google Scholar 

  • Matsuyama, K. (1995). Complementarities and cumulative processes in models of monopolistic competition. Journal of Economic Literature, 33, 701–729.

    Google Scholar 

  • Nocke, V., & Yeaple, S. (2006). Globalization and endogenous firm scope. NBER Working Paper 12322.

    Google Scholar 

  • Ottaviano, G., & Thisse, J.-F. (1999). Monopolistic competition, multiproduct firms and optimum product diversity. CEPR Discussion Paper 2151.

    Google Scholar 

  • Porter, M. E., Takeuchi, H., & Sakakibara, M. (2000). Can Japan compete?. Cambridge: Perseus Publishing.

    Google Scholar 

  • Raff, H., & Schmitt, N. (2005). Endogenous vertical restraints in international trade. European Economic Review, 49, 1877–1889.

    Article  Google Scholar 

  • Raff, H., & Schmitt, N. (2006). Exclusive dealing and common agency in international markets. Journal of International Economics, 68, 485–503.

    Article  Google Scholar 

  • Raff, H., & Schmitt, N. (2009). Buyer power in international markets. Journal of International Economics, 79, 437–447.

    Article  Google Scholar 

  • Raff, H.,& Schmitt, N. (2009b) Imports, pass-through, and the structure of retail markets. CESifo Working Paper 2817.

    Google Scholar 

  • Rauch, J. E. (2001). Business and social networks in international trade. Journal of Economic Literature, 39, 1177–1203.

    Article  Google Scholar 

  • Schmitt, N., & Yu, Z. (2001). Economies of scale and the volume of intra-industry trade. Economics Letters, 74, 127–132.

    Article  Google Scholar 

  • Yu, Z. (2002). Entrepreneurship and intra-industry trade. Review of World Economics, 138, 277–290.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Graduate School of Economics, Kobe University, Kobe, Japan

    Toru Kikuchi

  2. Department of Economics, McGill University, Montreal, H3A2T7, Canada

    Ngo Van Long

Authors
  1. Toru Kikuchi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ngo Van Long
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ngo Van Long .

Editor information

Editors and Affiliations

  1. , Department of Economics, Jadavpur University, Kolkata, 700 032, West Bengal, India

    Rajat Acharyya

  2. Calcutta (CSSSC), Center for Studies in Social Sciences, Kolkata, 700 094, West Bengal, India

    Sugata Marjit

Appendix

Appendix

Derivation of Eq. (34).

$$ \left( {\hat{r}_{f} } \right)^{LR} = - \frac{(\varepsilon - 1)(\sigma - 1)}{\sigma - \varepsilon }\hat{t} - \frac{(\alpha - \varepsilon )(\sigma - 1)}{(\alpha - 1)(\sigma - \varepsilon )}\left( {\hat{s}_{f} } \right) $$

Then, we use the following relationship:

$$ \hat{s}_{f} = - \left[ {\frac{(\sigma - 1)(\varepsilon - 1)(\alpha - 1)}{(\sigma - \varepsilon )(\alpha - \varepsilon )}} \right]\hat{t} $$

The result follows immediately.

Rights and permissions

Reprints and permissions

Copyright information

© 2014 Springer India

About this chapter

Cite this chapter

Kikuchi, T., Van Long, N. (2014). A Simple Model of Foreign Brand Penetration with Multi-Product Firms. In: Acharyya, R., Marjit, S. (eds) Trade, Globalization and Development. Springer, India. https://doi.org/10.1007/978-81-322-1151-8_5

Download citation

Publish with us

Policies and ethics

Search

Navigation