Vertical Differentiation, Wage Bargaining and Intra-Industry Trade Liberalization

Abstract

This article analyzes the effects of trade liberalization between two asymmetric industries. Asymmetries concern consuemers' masses and labor endowments. The latter, together with human capital specificity in the production of the variants of a vertically differentiated good, determine market form and the range of products available in each industry. We show that market integration benefits or harms the agents in the industries following on industry-specific parameters. As the conditions on gains and losses from trade are independent between countries, bilateral losses from trade can emerge at equilibrium.

Keywords: vertical differentiation, workers' skills, wage bargaining, trade liberalization, industry asymmetries

JEL Classification: L11, J00, F14