International Trade and Industrial Policy in Discrete Choice Models of Love of Variety

Download or read book International Trade and Industrial Policy in Discrete Choice Models of Love of Variety written by Ningwei Liu and published by . This book was released on 2005 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt: Consider an individual who is confronted with a set of mutually exclusive alternatives and who must make a choice among them. The neoclassical economist's approach to this problem is to assume the consumer's choice process is deterministic. Reality, however, tells a different story. For example, when an individual must make repeated choices between two alternatives under similar circumstances, sometimes one and sometimes the other will be chosen. Such behavior reflects fluctuations inherent in the process of evaluating alternatives, which suggests that the deterministic choice model is not always satisfactory as an explanatory tool. Discrete choice approach provides an ideal way for describing the demands for differentiated products, since it deals explicitly with a population of heterogeneous consumers making mutually exclusive choices from a set of substitutable goods. Under the framework of discrete choice models of love of variety, this dissertation, firstly through developing a general equilibrium monopolistic competition model, studies market structure under autarky as well as under free trade. The results show that ceteris paribus, the larger is the love of variety index, the more is the equilibrium number of firms in the differentiated good industry. Moreover, under free trade, the equilibrium number of firms in the more (less) efficient country will expand (shrink). As a consequence, the efficiency composition of the industry in the more (less) efficient country will worsen (improve). It is also interesting to reveal that the equilibrium price for each variant is uniformly marked up by the same amount, which is equal to the index of the degree of love of variety. This dissertation then further researches into some economic policy issues. In the study of the excessive competition, it is shown that there is always excess entry when there are only domestic, firms in the industry. However, whenever there are FDIs in the economy, the theorem is not applicable. Finally, the dissertation examines the optimal subsidy policy. The results show that the policy has nothing to do with the improvement of social welfare if the subsidy is symmetric. But if only the foreign firms "enjoy" the policy, the optimal policy would be taxing them. A real subsidy may happen only when the foreign firms are very inefficient compared to the domestic firm. In this situation, the host country gains a lot from employment improvement.