Location costs, product quality and implicit franchise contracts

the literature on international trade, only little attention has been given to informational asymmetries between firms and consumers with respect to p roduct quality. The few economic models that analyze the question of how as ymmetric information about product quality might affect trade flows treat p roduct 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 cert ain conditions and thereby affect international trade flows. More specifica lly, intra-industry trade in vertically differentiated experience goods can be determined by information asymmetries about product quality. (C) 2000 E lsevier Science B.V. All rights reserved.