Appendix
A1 Relationship between φ*i and ^*j∙
Using the demand equations (3) and the fact that pij∙[^] = τij∙pii[φ], we can express relative
revenues at home and in the foreign country j from a firm with productivity φ based in
country i as:
Rij И = τι-σ (P V-1 ( j ʌ (MMi.V-ν
Rii [φ] ij к Pi Yi M J
(A1)
The zero-productivity cut-off above which firms produce for the domestic market, φ*ii,
and the exporting productivity cut-off, above which firms produce for both the domestic
and the export market j, φ*j, are determined by Rii[φ*i] = σfiiPi and Rij∙[φ*j] = σfij∙Pi,
respectively.
Combining these two equations leads to an equation that links the revenues of a firm
at the zero-profit productivity cut-off to those of a firm at the exporting productivity cut-
off. Further, the relationship between revenues of two firms with different productivities
′′ σ-1
^4 Rii[φ'ii]. These two
relationships together yield and equilibrium relationship between the two productivity
cut-offs:
λ*
^ij
Λij
Λij <⅛
Pi
τ ij Pj
with
f YifijA σ-1 f⅛ ʌ σ-1
к Yj fii MJ ’
(A2)
(A3)
The profits from serving the foreign market have to be large enough to justify the extra
fixed costs fij, where Λij would collapse to τij (fij /fii)1σ-11 in the case of complete
symmetry. For φ*j > φ*i, we need Λij∙ > 1. In the symmetric case, this requirement boils
down to fij τ σ-1 > fii .
46
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