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Intransparent Markets and Intra-Industry Trade

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  • Christian Gormsen Schmidt, Denmark

Buyers are typically unaware of the full set of offers when making a purchase. This paper examines how international trade interacts with this problem of market intransparency. Sellers must communicate their offers through costly advertising, but cannot reach all buyers. Consequently, no market clearing price exists, and sellers randomize over an equilibrium price distribution. Letting sellers advertise their offers abroad leads to international trade, which would not take place under complete information. Buyers then receive more offers, leading to lower prices and welfare gains. Sellers in the model are identical, but appear heterogeneous due to their price randomization. In larger and more open economies, prices and markups will be lower, and exports are primarily realized by sellers who charge low prices. These predictions are similar to those of trade models where firm heterogeneity is assumed exogenously.

Original languageEnglish
Publication year2009
Number of pages21
Publication statusPublished - 2009
EventEuropean Trade Study Group Annual Conference - Roma, Italy
Duration: 10 Sep 200912 Sep 2009
Conference number: 11


ConferenceEuropean Trade Study Group Annual Conference

    Research areas

  • Advertising, Intra-industry trade, Firm heterogeneity, Price dispersion

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