PRODUCT QUALITY, PREFERENCE DIVERSITY AND INTRA-INDUSTRY TRADE

This study focuses on the impact of preference diversity and relative country size on intra-industry trade (IIT) in an industry with a vertically differentiated product. By adopting a two-stage game model, we find that the IIT share is higher between countries with a similar preference for quality and that the impact of country size on the IIT index is asymmetric depending on the relative size of the exports and imports of the country. The results of the model can be empirically tested, since preference diversity and country size are related to per capita income and population, respectively.