Location costs, product quality and implicit franchise contracts

Abstract

In the literature on international trade, only little attention has been given to informational asymmetries between firms and consumers with respect to product quality. The few economic models that analyze the question of how asymmetric information about product quality might affect trade flows treat product quality as exogeneous. In contrast, our model takes product quality as an endogeneous variable, i.e. firms can choose the quality they wish to produce. In this case, location costs can signal product quality under certain conditions and thereby affect international trade flows. More specifically, intra-industry trade in vertically differentiated experience goods can be determined by information asymmetries about product quality.