Quality, Trade and the Moving Window: The Globalisation Process

Abstract

The globalisation process is analysed in a model where firms differ in productivity and quality. A lower bound to quality emerges, below which firms cannot sell, however low their (local) wage rate. The range of quality levels between the maximum and this lower bound shifts upwards when trade is liberalised (the moving window). The initial phase of globalisation, associated with trade liberali-sation, in an initially segmented (but not autarkic) world, may reduce welfare in countries with intermediate levels of capability, but these countries may be the most important gainers as capa-bilities are transferred in subsequent phases. This article analyses the globalisation process by reference to a model in which firms differ in respect of both productivity and quality (capability). The model is of a kind that is standard within the Industrial Organisation literature but differs in important ways from models such as the CES type models of Dixit and Stiglitz (1977), Krugman (1978) and Fujita et al. (1999) that are standard in the trade literature. The model of product market competition on which the present analysis rests is one of a broad class of models that are used in the modern literature on market structure. The main argument in favour of these models is that they lead to empirically successful