هزینه های محل، کیفیت محصول و قراردادهای ضمنی حق رای دادن (فرانچایز)

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.

The literature on strategic trade policy, initiated by Brander and Spencer (1985) and reviewed by Brander (1995), analyzes the effects of trade policy under conditions of imperfect competition. These models demonstrate that government intervention may be beneficial for a country in some situations. What is rather surprising in this context is that potential effects of asymmetric information have only been explored to a rather limited extent – although we have known at least since the path breaking work of Stigler (1961) and Akerlof (1970) that markets with even small informational asymmetries are qualitatively different from markets with symmetric information. The few models that deal with trade policy under asymmetric information almost exclusively focus on informational asymmetries either between firms and the government (Brainard and Martimort, 1997) or between domestic firms and foreign rivals (Collie and Hviid, 1993). Common to these models is the idea that government intervention may be beneficial for a country by making an output expansion of the home firm credible. Moreover, as Qiu (1994) has demonstrated, if neither the domestic government nor a foreign rival can observe the firm’s costs, the government can play a second role: by offering a separation inducing menu firms might eventually be enabled to signal their costs to a foreign rival. Only little attention has been given to informational asymmetries between firms and consumers and the question of how these asymmetries may affect international trade. Particular exceptions are the models of Mayer, 1984 and Grossman and Horn, 1988 and Bagwell and Staiger (1989) which discuss a country’s optimal trade policy when (foreign) consumers are uninformed about domestic product quality. As these models do, we will consider the case of an “experience good” for which the quality is unknown to consumers.1 However, our model differs in important respects. First, the models mentioned above assume that product quality is either exogeneously determined or given by the firm’s technology which the firm chooses once and for all before it enters the market. In either case, any credibility problem is resolved once consumers have learned a firm’s product quality. In contrast, we will treat quality as a choice variable in any single period, so that there is a moral hazard or commitment problem connected with product quality.2 Accordingly, the mechanisms by which firms can acquire reputations are quite different. Second, Mayer (1984) assumes that the home country’s government is informed about a product’s quality. In contrast, we will consider the case in which even the government is uninformed about the firm’s type. The government is assumed not to know more than any consumer. Similar to Bagwell and Staiger (1989) and Qiu (1994) we will assume that neither the domestic government nor consumers know a firm’s production costs, although they know the distribution from which the type is drawn. Thirdly, the focus of Mayer (1984) and Grossman and Horn (1988) is on the welfare effects of infant-industry protection, where new entrants have to compete against incumbent firms that have an established reputation. As Grossman and Horn (1988) note, their model focuses on “producers of experience goods and services in countries that are followers rather than leaders in innovative industries”. In contrast, our focus is on innovative firms and how uncertainty about the quality of new products may affect international trade flows and investment. Finally, Grossman and Horn (1988) explicitly leave the task of identifying mechanisms that reward high-quality firms, but do not encourage entry or expansion by others to future research. This paper argues that imposing location-specific costs on firms may be such a mechanism. This paper extends our recent work in Haucap et al. (1997) in which rational consumers use the “Made-in” label as a signal for product quality if countries differ in location-specific costs and relocation is costly. In this case, production at a high-cost location can credibly signal high-quality production while production at a low-cost site indicates low product quality. While we take prices as given and do not account for differences in production costs in Haucap et al. (1997), our analysis in this paper presents a much more refined model that derives a monopolist’s optimal pricing strategy and allows for differences in production costs. Moreover, the focus of Haucap et al. (1997) is on the legal protection of “Made-in” labels while this paper concentrates on potential implications for international trade and investment. Our model is also related to work by Chiang and Masson (1988) and Chisik (1998) who show that consumers may use country-of-origin labels in situations of adverse selection. These models differ from ours in some important respects. Chiang and Masson (1988) analyze a case in which country-of-origin effects are the result of consumers statistically discriminating between goods on the basis of the products’ country of origin. In this model, consumers only know the average product quality produced by firms in a certain country. Accordingly, consumers form their expectations about product quality based on the product’s place of production. In contrast, our model provides a signalling explanation for country-of-origin effects. Similarly, Chisik (1998) analyzes country-of-origin effects in a signalling context. However, his model is based on statistical discrimination effects, and country-of-origin labels are only used as signals for product quality when the signalling process is noisy. In contrast, we consider a signalling process without noise. Furthermore, in Chisik’s model high-quality producers have lower signalling costs than low-quality firms. In our model, every firm faces the same signalling costs, but only some firms are able to bear these costs due to their low costs of high-quality production. Finally, in Chisik (1998) firms have to make long-run quality choices so they are committed to their quality level once its is chosen. In contrast, we allow firms to choose quality in every single period of the game. The rest of the paper is organized as follows. The next section will introduce and analyze the model. In Section 3, the model is related to empirical findings in the international marketing literature, and Section 4 briefly discusses potential implications for international trade, location choice (or foreign direct investment) and fiscal competition. Section 5 offers concluding remarks.

In this paper, we have offered an additional reason for intra-industry trade. If firms can choose the quality they wish to produce, and consumers find it difficult to determine product quality before purchase, the location of production can signal product quality under certain conditions, and thereby affect international trade flows. In this model, intra-industry trade in vertically differentiated experience goods can be determined by information asymmetries about product quality. The model provides an explanation for the empirically observed, but in economic theory widely neglected phenomenon that consumers judge a product’s quality by its location of production. In our model, high country-specific costs such as high taxes or wages and compulsory exit costs serve as a “natural” screening device that enables consumers to differentiate between firms that produce high-quality goods at low costs and for which the promise to deliver high quality is self-enforcing and those firms that find it profitable to “hold up” consumers. If the “Made-in” label is used as a signal for product quality, trade flows may be determined by country-of-origin effects. According to our theory, high-cost countries would now rather export high-quality experience goods while importing low-quality experience goods and search goods while the opposite should hold for low-cost countries. Furthermore, we have argued that, in contrast to much of the recent trade literature, which shows the potential benefits of export subsidies, high location costs such as high taxes may help a firm in its endeavours to signal product quality. Moreover, if capital is mobile to some degree and plant locations endogenous, the model also gives a new rationale for location choice and foreign direct investment: Firms that can produce high quality at low costs might consciously choose high-cost locations for production as a means to signal product quality. Location choice can be seen as analogous to the conclusion of a franchise contract: the host country rents out its brand name (“Made in Country XY”) for which it periodically receives a franchise royalty which is usually called tax in this context. Contrary to standard franchise contracts, however, we have emphasized the role of exit costs which allow to waive initial capital requirements. Proceeding from this hypothesis, we have finally suggested that intergovernmental competition and location tournaments do not necessarily have to result in cut-throat tax competition, subsidy races and the lowering of social and environmental standards as the standard literature on international public finance argues. While we have only explored some possible implications of our model so far, we hope that the questions raised will stimulate further research in this direction.