Trading Away Wide Brands for Cheap Brands - sdhingra.com.pdfVIP

Trading Away Wide Brands for Cheap Brands Swati Dhingra London School of Economics and CEP This draft: November 15, 2012 Abstract Firms face competing needs to expand product variety and reduce production costs. Access to larger markets enables innovation to reduce costs. Although firm scale increases, foreign competition reduces markups. Firms’ ability to recapture lost markups depends on the inter- play between within-firm competition and across-firm competition. Narrowing product variety eases within-firm competition but lowers market share. I provide a theory detailing the im- pact of trade policy on product and process innovation. Unbundling innovation provides new insights into welfare gains and innovation policy. Product innovation increases welfare be- yond standard gains from trade. The relative returns to innovation policy change with trade liberalization. Acknowledgment. I am grateful to Bob Staiger for continued guidance and to Charles Engel and Steven Durlauf for their support and comments. This paper has benefited from helpful comments of David Atkin, Maria Bas, Andy Bernard, South Bisonyabut, Stefania Garetto, Scott Gehlbach, Elhanan Helpman, Wolfgang Keller, Amit Khandelwal, Rasmus Lentz, Rebecca Lessem, Jim Lin, Kalina Manova, Marc Melitz, Marc Muendler, Peter Neary, Nina Pavcnik, Dan Quint, Natalia Ramondo, Steve Redding, Esteban Rossi-Hansberg, Scott Taylor, Stephen Yeaple, Alwyn Young, Mian Zhu, participants at various seminars, two anonymous referees and especially John Morrow. 1 1 Introduction Trade liberalization provides welfare gains by increasing product variety and productivit