ON THE PERSISTENCE OF LEADERSHIP OR LEAPFROGGING IN INTERNATIONAL-TRADE

When two countries starting from different quality levels (reflecting different conditions on domestic market demands) open to trade, two po ssible equilibria arise. In the first, the quality leader maintains it s position. In the second, leapfrogging occurs. However, the latter is possible only if the initial quality gap is not too wide. Further, wh en the risk dominance criterion is used, only the former equilibrium i s selected. These results suggest that initial conditions (such as dom estic market size or home demand preferences) are important factors in determining relative competitiveness of firms in international market s.