# 经济代写|国际经济学代写International Economics代考|EC340

## 经济代写|国际经济学代写International Economics代考|IIT IN IDENTICAL PRODUCTS

IIT in identical products may arise for two reasons. The first and the simplest reason lies in transport costs. Consider two large neighbouring countries Canada and the US. When transport costs increase with the distance that a good is transported then it is cost minimizing for a trader to buy a good from a production location nearest to his selling location. If transport costs are the same regardless of the destination, being within the same or across political boundaries, and there is free movement of goods across countries, then the nearest production location may well be across the border. For example, it may be cost saving for an American seller in the Buffalo county region to import a good from border-states in Canada rather than transporting the same good from production units in California or Arizona in the United States.

Similar incentives may exist for a Canadian seller in British Columbia for importing the same good from the border-states of the United States such as Alaska or Washington DC, to save on transport cost. Thus, transport costs may explain this type of border trade in identical goods. However, note that this explanation holds only for trading nations that have a large common border and are themselves large geographically so that transporting a good from a production location within the country is costlier than transporting the same good from a production location in the other country.

The second reason why IIT in identical products can arise is rooted in the motive for reciprocal dumping under market imperfections. This explanation does not require trading partners to have common borders or be geographically large themselves. James Brander (1981) was the first to offer this explanation for IIT in identical goods among similar countries, which was subsequently refined and extended by James Brander and Paul Krugman (1983). A voluminous body of literature grew thereafter with different underlying assumptions regarding the market structure and the strategic interaction not only among firms but also among national governments in terms of their trade policy instruments. For these defining characteristics of strategic interaction, this body of IIT literature is also known as the strategic trade theory.

Suppose computers of an identical variety are being produced in India and the United States by monopoly firms in each country. The production technology is the same everywhere and exhibits constant returns to scale. Setting aside other goods that are being produced under perfectly competitive conditions in India, the domestic market for computers is depicted in Figure 8.2. Suppose the local demand for computers varies linearly with its price, and the marginal cost of production is constant with no fixed costs of production whatsoever.

## 经济代写|国际经济学代写International Economics代考|IIT IN HORIZONTALLY DIFFERENTIATED PRODUCTS

Economies of scale, or increasing returns to scale technology, which itself gives rise to market power for firms, is a main explanation for IIT in differentiated products. The theoretical explanations for this category of IIT are couched in terms of a monopolistically competitive market environment under the assumptions of economies of scale and different varieties of the samegood that distinct and yet close substitutes of each other. Economies of scale do not allow a particular variety to be produced by more than two firms. Thus, each firm has monopoly power over the variety it produces. At the same time, the varieties are assumed to be close substitutes to each other in consumption and hence to compete with each other. The market power of firms is thus limited. Given such a monopolistically competitive market environment, two distinct theoretical explanations have emerged that differ with respect to the characterization of consumers’ preferences and the nature of the differentiated varieties. One is Paul Krugman’s (1979) analysis based on Dixit and Stiglitz’s (1977) ‘love for variety’ approach and the other is Helpman’s (1981) analysis based on the ‘characteristics’ approach developed by Lancaster (1979).

Paul Krugman in his seminal works in 1979 and 1980 , used the Chamberlinian monopolistic competition and the Dixit-Stiglitz type consumer preference for a love for variety to offer his explanation of IIT in differentiated products. By the love for variety specification, a typical consumer prefers variety and thus buys all the varieties that are available in the market. Her utility improves not only from the number of units of each variety that she consumes, but more importantly from the number of varieties that she can consume. Thus, if $n$ varieties are available in the market, then the simplest way to capture her preference is through the following additively separable utility function:
$$U=v\left(c_1\right)+v\left(c_2\right)+v\left(c_3\right)+\ldots \ldots+v\left(c_n\right), v^{\prime}\left(c_i\right)>0, v^{\prime \prime}\left(c_j\right)<0$$
where $c_i$ is the unit of the $i$-th variety purchased and consumed. Note that all varieties enter her utility function in the same way, meaning that a particular variety per se does not matter. What matters to her is the number of varieties that she consumes. This is not something which is unusual because in the Chamberlinian product variety concept, varieties are superficially differentiated from each other. On the other hand, examples of love for variety are not hard to find. The typical example is that of dress material. When we buy more than one shirt, it is highly unlikely that we will buy two shirts of the same colour. We may have a preference for a particular colour, green or blue or grey, but here this is immaterial. Despite our preference for a particular colour, we do mix our wardrobes with shirts of different colours because we love variety. Similar love for variety is evident in purchase of neck-ties, shoes, contact lenses, ear-rings, ice-creams of different flavours, and the like.

## 经济代写|国际经济学代写国际经济学代考|IIT IN水平差异化产品

$$U=v\left(c_1\right)+v\left(c_2\right)+v\left(c_3\right)+\ldots \ldots+v\left(c_n\right), v^{\prime}\left(c_i\right)>0, v^{\prime \prime}\left(c_j\right)<0$$

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