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Department of Economics, Aarhus School of Business, University of Aarhus Working Papers, Department of Economics, Aarhus School of Business, University of Aarhus

No 09-20:
Intransparent Markets and Intra-Industry Trade

Christian Gormsen ()

Abstract: Buyers are typically unaware of the full set of offers when making a purchase. This paper examines how international trade interacts with this problem of market intransparency. Sellers must communicate their offers through costly advertising, but cannot reach all buyers. Consequently, no market clearing price exists, and sellers randomize over an equilibrium price distribution. Letting sellers advertise their offers abroad leads to international trade, which would not take place under complete information. Buyers then receive more offers, leading to lower prices and welfare gains. Sellers in the model are identical, but appear heterogeneous due to their price randomization. In larger and more open economies, prices and markups will be lower, and exports are primarily realized by sellers who charge low prices. These predictions are similar to those of trade models where firm heterogeneity is assumed exogenously.

Keywords: advertising; intra-industry trade; firm heterogeneity; price dispersion; (follow links to similar papers)

JEL-Codes: D43; D83; F12; M37; (follow links to similar papers)

28 pages, October 1, 2009

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