Trade and Multinational Production: Lessons From the Motor Vehicle Industry

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Hyatt Regency Chicago, Burnham
Hosted By: Econometric Society
  • Chair: Keith Head, University of British Columbia

What Drives Home Market Advantage

A. Kerem Cosar
,
Stockholm School of Economics
Paul Grieco
,
Pennsylvania State University
Shengyu Li
,
Durham University
Felix Tintelnot
,
University of Chicago

Abstract

In the automobile industry, as in many tradable goods markets, firms
earn their highest market share within their domestic market. This home market advantage persists despite substantial integration of international markets during the past several decades. The goal of this paper is to quantify the supply- and demand-driven sources of the home market advantage and to understand their implications for international trade and investment. Building on the random coefficients demand model developed by Berry, Levinsohn, and Pakes (1995), we estimate demand and supply in the automobile industry for nine countries across three continents, allowing for unobserved taste and cost variation at the car model and market levels. While trade and foreign production costs as well as taste heterogeneity matter for market outcomes, we find that preference for domestic brands is the single most important driver of home market advantage - even after controlling for brand histories and dealer networks.

Brands in Motion: How Frictions Shape Multinational Production

Keith Head
,
University of British Columbia
Thierry Mayer
,
Sciences Po

Abstract

Using disaggregated data on car assembly and trade, we estimate a model of multinational
production. Decisions of which markets to enter, how much to sell in each, and which assembly locations to select for each market depend on three types of friction. In addition to the trade and multinational production costs emphasized in past work, we incorporate a third friction: regardless of production origin, selling costs in a market rise with separation from the brand's headquarters. The estimation transparently recovers all the structural parameters. We then simulate the consequences of controversial trade policy changes: TPP, TTIP, Brexit, and NAFTA abrogation.

Shocks, Mark-Ups and Production Flexibility

Alan Spearot
,
University of California-Santa Cruz

Abstract

Models of product differentiation link mark-ups and competitive conduct to market shares within product groups. Naturally, varieties with larger market shares have higher market power. We develop a new framework based on production complexity that yields an analogous relationship on the supply side. More concentrated production requires fewer product changeovers, thereby lowering relative marginal costs for varieties with larger within-firm market share. Through this production complexity channel, for firms that produce many varieties within the same plant, the distribution of mark-ups is further skewed toward high market-share varieties. We implement the model using data from the light-duty truck market for 1990-2000, and evaluate the role of production complexity in the distribution of mark-ups. We also exploit the change in the production market facilitated by NAFTA to study the interplay between the structure of production and mark-ups.
Discussant(s)
Thierry Mayer
,
Sciences Po
Alan Spearot
,
University of California-Santa Cruz
Felix Tintelnot
,
University of Chicago
JEL Classifications
  • A1 - General Economics