Week 6 Discussion Putting it All Together - Revising the Justif.docx

Week 6 Discussion
"Putting it All Together - Revising the Justification Report"
Please respond to the following:
· This week, you will utilize the techniques that you have
studied in your Week 6 readings to revise your Justification
Report while adding the final parts. Based on your readings,
state three (3) things that you will be looking for as you revised
and proofread (e.g. organization, structure, grammar elements).
Discuss the strategies that you will implement to ensure that
your assingment is polished and in final draft format.
·
·
· Bottom of Form
About the Paper and Presentation
1) The paper and project are your report on your own project of
research. Your
research may be based on reading, evaluation and summary of
research in the
literature or may include your own statistical analysis or other
gathering and
analysis of data. You will choose a topic for your project during
the first week.
(See the document “Choosing a Topic.”) This year I am
requiring groups of four
students to speak on topics from the same area on the same date.
These groups
will be formed at the first class meeting or assigned by me. You
are required to

choose (in consultation with me) a research paper from the
literature to be
assigned for the other students to read in preparation for your
presentation. While
you should explain the assigned paper in your presentation,
your presentation and
your paper are on the topic you chose, not on the assigned
paper.
2) This is a Writing Intensive course and satisfies part of the
requirement for three
Writing Intensive courses to graduate. The objective of Writing
Intensive courses
is for you to practice writing using the writing process of
successive revisions.
Accordingly, you are expected to turn in three drafts of your
paper: the first to
accompany your presentation, the second a revision in response
to comments
from students on your presentation and the accompanying first
draft, and a final
revision tenth week. Failure to comply with this requirement
will result in grade
penalties. Dr. McCain will act as a consultant both on writing
and on the
economics of your project. Since consulting is “work done for
hire” (and Dr.
McCain is modestly paid by Drexel for this) Dr. McCain’s help
needs not be
acknowledged in your bibliography of references.
3) Plagiarism is grounds for failure in the course. Material
copied from an internet

source and pasted into a term paper is considered plagiarism
(and is usually pretty
easy to find with a search). Even if some words in the pasted
material are changed
to make it a “paraphrase,” Drexel policy considers this
plagiarism. Papers for Dr.
McCain’s classes are to be turned in BOTH in hardcopy AND
electronically by
the indicated due date. The electronic copy should be a WORD
or RTF document
and will be used for screening for plagiarism and kept on disc
for the long-term
record, while the hardcopy version will be marked and returned
to you. Keep both
versions in your own records for at least a year.
4) For this course, you are not permitted to paste any text into
your paper that is
copied from an electronic source, without exception. There are
two reasons for
this.
a. The point of a Writing Intensive course is for you to get
practice in
writing, not pasting.
b. Pasting is a slippery slope that may leave you with plagiarism
despite your
intention to “clean it up” by putting in quotation marks or
“paraphrasing.”
You may forget, and anyway “paraphrasing” is still plagiarism
(see
above.) Students have been failed for this reason.

c. There may be good reasons to use quotations, though you
should limit the
number of quotations. I want to see your thoughts in your own
words. If
you do use quotations, type them in, as I did in 1965.
5) Using Online Sources: The Web offers a very large range of
sources for
presentations and papers, but it is a mishmash of sources that
range from excellent
to appallingly bad to deliberately misleading. You should not
use an online source
for any purpose in this course without first verifying that it is:
a. Substantive for the purpose intended. For most purposes a
document that is only a few lines long will not be useful. This
does depend on the purpose. To be used as a reference for the
paper or presentation, for example, the source should provide at
least a few pages of information on the topic. By contrast, if the
purpose is to define a term, then a line or two may be sufficient.
Message boards and blogs should not be used. There are some
quite authoritative blogs but blogs as a group are not
predictable
enough to be used.
b. Reliable. Much of the content on the web is no more reliable
than
the opinions you may hear in barroom conversation. Among the
things that make information reliable are

i. Institutional Authority. Is the site sponsored by an
institution that is recognized as an authority and that would
exercise oversight, such as the United Nations or the
National Bureau of Economic Research? Personal websites
(including mine) are less reliable.
ii. Personal Authority. Is the author identified? If so, is the
author recognized as an expert in a field relevant to the
topic? What evidence is there of this recognition? Does the
author have graduate degrees in the field? Has she or he
published articles in recognized scholarly organs relevant
to the field? Books?
iii. Internal evidence. Are there misspellings, grammatical
errors, and other evidence of unscholarly writing? Are there
logical errors and inconsistencies? Are there
representations of fact you know to be false? If you find
any evidence of these failings, DO NOT USE THE
SOURCE.
c. Unbiased or biased in known ways. Two of my students a few
years ago used economics citations from Communist web-sites.
There is nothing particularly wrong with this – I know at least
two very good Communist economists, and Communists are
more likely to be interested in economics than, for example,
Methodists – but the material may well have had a slant and you
should not use material that could be slanted without knowing
how much slant there is and what it is. (The same cautions
apply
with equal force to conservative websites).

i. If there is an institutional authority, it may be biased, and
may make the bias known. If there is an “About Us” page
or equivalent, check it. Examples would be the Ludwig von
Mises Institute, which supports free market economics, and
Marxists.org, which doesn’t. These are both excellent
sources for some purposes but should be used with caution.
The Center for Economic and Policy Research is a little
more difficult to assess. Hint: somewhat lefty.
ii. If the author is known, and has or announces a known slant,
that may be useful.
iii. Internal evidence may be found. For example, The Center
for Economic and Policy Research “about us” page lists an
advisory board including two economists who were high-
profile supporters of Kerry in ’04.
Wiley and Canadian Economics Association are collaborating
with JSTOR to digitize, preserve and extend access to The
Canadian Journal of Economics / Revue canadienne
d'Economique.
http://www.jstor.org
Decentralized International Exchange
Author(s): Robert R. Reed and Kathleen A. Trask
Source: The Canadian Journal of Economics / Revue
canadienne d'Economique, Vol. 39, No. 2 (
May, 2006), pp. 516-543
Published by: on behalf of the Wiley Canadian Economics
Association

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Decentralized international exchange
Robert R. Reed Department of Economics, University of
Kentucky
Kathleen A. Trask The Services Group

Abstract. We utilize a random-matching model to examine the
relationships between
market frictions and international trade. In our setting, an
individual may choose to
search abroad where she may have a cost advantage, but is less
likely to meet potential
trading partners, owing to higher market frictions. Interestingly,
we find that interna-
tional trade may be associated with lower welfare than autarky.
We show how this is
due to price distortions resulting from bargaining when there
are opportunities for
exchange across countries. JEL classification F10, C78, D83
Echanges internationaux dicentralises. Les auteurs utilisent un
modele d'arrimage alea-
toire pour examiner les relations entre les coilts de transaction
dans le marche et le
commerce international. On postule qu'un individu peut choisir
de chercher des parte-
naires commerciaux dans d'autres pays oui il peut avoir un
avantage de cofits mais qu'il
est moins susceptible de rencontrer de tels partenaires 'a cause
des cofits de transaction.
II1 appert que le commerce international peut etre associei a un
niveau de bien-etre plus
bas que ce que genererait l'autarcie. On montre comment cela
est attribuable aux
distorsions de prix qui decoulent du marchandage quand il y a
des opportunites
d'&change entre pays.
1. Introduction
Any model of international trade asks the following: 'Why does
exchange take

place between countries?' Traditional trade theory focuses on
this issue by
examining the determinants of comparative advantage and
investigating the
effects of policy on relative prices, trade volumes, and welfare.
These insights,
We are grateful to Ronald B. Davies and Chris Waller for
valuable discussions. We
also thank Marco Castenada, Josh Ederington, David Wildasin,
and two anonymous
referees for important suggestions. Seminar participants at
Alabama, Kentucky, Oregon,
Notre Dame, Tilburg, and the Midwest International Economics
Conference provided
insightful comments. Email: [email protected]
Canadian Journal of Economics / Revue canadienne
d'Economique, Vol. 39, No. 2
May / mai 2006. Printed in Canada / Imprime au Canada
0008-4085 / 06 / 516-543 / ? Canadian Economics Association
2015 17:06:00 UTC
Decentralized international exchange 517
however, largely avoid the question: 'How does exchange take
place between
countries?' Standard trade theory ignores this question by
assuming that

transactions (aside from transportation costs) are costless. That
is, most mod-
els of international trade typically specify that exchange takes
place in friction-
less environments, where trade is coordinated by a fictitious
Walrasian
auctioneer. However, what if there are frictions in exchange?
Are the predic-
tions and policy recommendations from traditional trade theory
robust to
decentralized trading environments? For example, under what
conditions will
free trade be associated with higher welfare from the
perspective of an indivi-
dual country? How does trade affect world welfare?
Moreover, available evidence suggests that such frictions act as
significant
barriers to exchange across countries. For example, Gould
(1994) finds that
immigration is associated with a higher volume of bilateral
trade from immi-
grants' home countries. In particular, he stresses that
immigration helps to
reduce market frictions inherent in international trade:
'immigrants bring with
them foreign market information and contacts that can lower the
transactions
costs of trade.' Casella and Rauch (2002) further emphasize
these aspects in
their work on ethnic ties: 'Connections to local agents facilitate
entry into
foreign unfamiliar markets by providing "insider knowledge"...
they give
access to the correct distribution channels and at times supply
the expertise

necessary to overcome local bureaucratic hurdles.' In addition,
Frankel (2000)
argues that a host of frictions limit the amount of exchange
across countries:
'Such differences in currencies, languages, political systems,
each have their
own statistically estimated trade-impeding influences, besides
the remaining
significant effects of distance, borders, and other geographical
and trade-policy
variables.'1 As a result, incomplete information about
opportunities for trade
in foreign markets can be either 'natural' (due to cultural or
language barriers)
or 'supernatural' (due to explicit trade policy). That is,
governments contribute
to the degree of market frictions incurred by foreign firms by
promoting or
limiting access to their markets.2
Therefore, traditional trade models based upon market-clearing
mechan-
isms fail to account for some significant features involved in
the process of
exchange across countries, in particular, the decentralized
nature of trade.
Obviously, understanding how such frictions affect the pattern
and volume
of trade is important for the development of optimal policy.
Nevertheless,
there has been relatively little work incorporating these aspects
of exchange
into the literature on international trade. In an attempt to fill
this gap, we
1 Frankel, Stein, and Wei (1993) find that more trade takes

place between countries that
share the same language. Thus, language barriers may impose
an additional friction in
exchange between countries - a friction that renders it more
difficult to obtain contacts in
the foreign marketplace.
2 The 1988 Economic Report of the President, among other
references, makes the
following observation: 'Invisible barriers to trade can take
virtually an unlimited number
of forms. Examples include discriminatory access to
distribution systems for foreign
goods relative to domestic goods' (133).
2015 17:06:00 UTC
518 R.R. Reed and K.A. Trask
depart from standard models by explicitly accounting for
information frictions
associated with exchange in a two-country setting. To begin, we
dispense with
the idea that trade, both within and across economies, is
coordinated by the
Walrasian auctioneer. In contrast, as in Diamond (1982), we
formally model
that trade is the result of a time-consuming process. In
particular, we assume
that contacts take place through pairwise random matching
between agents.

Given the bilateral aspects of exchange, the standard notion of
price-taking
behaviour dictated by the auctioneer no longer applies - instead,
the terms of
trade in each transaction occur as a result of bargaining.
Notably, each agent's
alternative opportunities for exchange affect the amount they
are willing to
trade. In this manner, each individual has a degree of monopoly
power.
Since we are interested in addressing how the decentralized
aspects of
exchange affect transactions across countries, we integrate
incomplete infor-
mation along with some traditional features of trade models.
Specifically, we
consider the Ricardian motivation based upon differences in
labour produc-
tivity and comparative advantage. In an open economy,
individuals may
choose to move between countries in search of trading
opportunities.
Although each country is characterized by search frictions, our
central hypoth-
esis is that agents find it more difficult to trade in the foreign
market. Thus, an
individual may choose to search abroad, where she may have a
comparative
advantage, but she is less likely to meet potential trading
partners, owing to
higher market frictions.
As each individual is able to influence both the amount they
produce and
relative prices, this leads to a pricing distortion in the economy.

Interestingly,
we characterize the severity of the price distortion in autarky in
terms of a
relative cost or matching advantage of agents. For example, if
an individual
finds it relatively more difficult to find alternative opportunities
for exchange,
his partner will effectively have more bargaining power.
Consequently, he must
produce more in a match and receives a lower relative price for
his output.
We show that open markets permit highly beneficial trade
between high-
productivity agents from each country. In fact, international
matches lead to
efficient terms of trade. However, when exchange between
countries is possible,
some agents who produce for the domestic market will have
greater bargaining
power. Consequently, this exacerbates the pricing distortion
from bargaining in
domestic matches. As a result, trade may lead to an 'anti-
competitive' effect in each
market.3 Thus, we find that international trade may lead to
greater efficiency,
owing to highly beneficial exchange, but it also can generate
more severe
pricing distortions in domestic transactions. Importantly,
through these chan-
nels, we demonstrate that international trade may be associated
with lower
welfare than autarky. Therefore, incorporating bargaining and
endogenous
3 A similar effect occurs in Markusen's (1982) model of foreign

direct investment. For
more discussion, see section 2 below.
2015 17:06:00 UTC
relative prices provides some novel intuition for the effects of
international
trade.4
Finally, we discuss the implications of our model for world
welfare and
trade policy. We find that world welfare may be higher when
search is suffi-
ciently more difficult in the foreign market than in the home
country. In these
settings, some highly productive international matches take
place, but the
pricing distortions from differences in bargaining power are not
too severe.
We conclude by studying a planner's choice of foreign market
participation
and obtain conditions under which free trade is likely to move
the world closer
to the global optimum. We also examine possibilities where
trade takes the
world away from the global optimum.
Our paper is organized as follows. Section 2 provides a
discussion of the related

literature. Section 3 outlines the autarkic version of our model.
This provides a
useful benchmark for examining the effects of international
trade in our economy.
In section 4, we describe the economic environment in the open
economy setting
and the incentives for international trade. To begin, we discuss
how differences
in relative prices across economies provide motivation for
exchange across
countries. The section proceeds by studying agent's choices
regarding market
participation in the world economy.5 Section 5 examines the
implications of our
model for world welfare and trade policy along with the
planner's choice of
foreign market participation. We provide some concluding
remarks in section 6.
2. Related literature
Our work complements earlier research by Casella and Rauch
(2002) and
Davidson, Martin, and Matusz (1987, 1991, 1999) who explore
the interactions
between market frictions and international trade.6 Casella and
Rauch also
interpret trade as a decision to enter the foreign market, but
model market
frictions due to uncertainty about the quality of foreign
matches. We pursue an
alternative notion of search frictions involving the time delay
until matching
occurs. In contrast to our approach, Casella and Rauch do not
explicitly
introduce the incentives for international trade. In their model,

they assume
that international matches may generate more surplus, while we
motivate
international trade through comparative advantage.
Alternatively, Davidson,
4 Casella and Rauch (2002) also consider the links between
market frictions and international
trade. However, in their model production is indivisible, so that
there is no notion of
pricing. In contrast to our work, in which differences in relative
prices provide a
necessary condition for trade across countries, they assume that
international matches
are potentially more productive than domestic matches. Further
details are described in
section 2 below.
5 This is analogous to the segmented markets approach in
Brander (1981) and Brander
and Krugman (1983), in which Cournot duopolists determine the
amount of output to ship
to each country. For more discussion, see section 2 below.
6 Alessandria (2004) provides another example. He extends a
model of costly consumer
search to explain deviations from the law of one price.
2015 17:06:00 UTC

Martin, and Matusz study the effects of international trade on
unemployment
by incorporating search frictions in the labour market. However,
the world
product market is assumed to be Walrasian.
Our framework improves on these earlier models by allowing
each agent to
bargain over how much to produce when matched. In contrast to
prior
research in which the total output from matching is exogenous,
both total
output and relative prices in each match are endogenous. As
discussed in the
introduction, including this aspect of matching introduces an
additional source
of inefficiency, owing to differences in bargaining power
between agents.
However, following standard trade models, differences in
autarkic relative
prices act as a necessary condition for exchange across
countries.
Although our approach departs from traditional trade theory by
incorpor-
ating incomplete information regarding opportunities for
exchange, it shares
similar themes that have been introduced in the new trade
literature. Notably,
recent contributions have introduced various aspects of
imperfect competition
into open economy settings. For example, Brander (1981),
Brander and
Krugman (1983), and Markusen (1981) consider the effects of
open markets

under Cournot-Nash competition between firms from different
countries.
Interestingly, Markusen (1981) demonstrates the potential for
international
trade to raise welfare even if both economies remain closed.
This occurs
because of the threat of increased competition from abroad.
However, when
countries differ in size, the small country always gains from
trade, while the
large country may lose.
Moreover, the segmented markets approach of Brander (1981)
and Brander
and Krugman (1983) also produces conflicting insights
regarding the effects of
international trade. On the one hand, trade has a welfare-
enhancing output
creation effect, owing to lower prices. Nevertheless, welfare
may fall, since
some domestic production is replaced by the foreign firm
subject to transpor-
tation costs.7 Finally, Markusen's (1982) model of
multinationals illustrates
similar trade-offs. Although opening markets can lead to greater
technical
efficiency, the multinational may decrease production, as a
result of higher
market power.
In contrast to the pricing distortions from imperfect
competition, inefficient
terms of trade arise in our framework as a result of bilateral
bargaining. This
notion of price determination seems appealing in our economy,
given pairwise

matching in decentralized trade. As individuals in each match
have different
opportunities for exchange, a natural notion of price
discrimination will be
observed. Specifically, high-productivity agents in each country
will have two
different markets in which they can trade. In international
matches between
agents from two different countries, the terms of trade will be
efficient, since
neither individual possesses a relative cost or matching
advantage. This is
7 Clarke and Collie (2003) prove that there are always gains
from trade under Bertrand
competition with differentiated products.
2015 17:06:00 UTC
analogous to Brander's (1981) output creation effect. However,
the terms of
trade in domestic transactions will be further distorted than they
would be
under autarky. This occurs because high productivity agents
who produce for
the domestic market have both a cost and a matching advantage
over low-
productivity individuals.

Consequently, the welfare effects of international trade will
depend on
whether the gains from increased output in international
matches offset the
welfare losses from pricing distortions in domestic exchange. In
particular, we
find the net impact depends on the relative degrees of search
frictions between
both countries as well as the productivity differential between
agents within
each market. If foreign search frictions are sufficiently strong,
the amount of
international exchange is inefficiently low. However, if
frictions in the foreign
country are not too much higher than at home, the amount of
foreign market
participation is excessively high because of the large changes in
bargaining
power. In these settings, we demonstrate that international trade
may be
associated with lower welfare than under autarky.8 Moreover,
our results
provide alternative insights regarding the effects of
international trade under
imperfect competition. For example, Brander and Krugman
(1983) find that
trade will be associated with lower welfare under high
transportation costs. In
contrast, we show that trade may be more likely to have adverse
consequences
when the costs of entry into foreign markets (in terms of the
delay in matching)
are relatively low.
3. Autarky

In this section, we present an autarkic version of our model, in
which all agents
face identical search frictions. An examination of the autarkic
equilibrium
allows us to describe our framework in a tractable setting and,
most important,
sets a benchmark for evaluating the open economy equilibrium.
We begin by
describing the components of the physical environment and
characterizing the
decisions faced by agents in the economy. We then define and
examine the
properties of the steady-state equilibrium that emerges.
3.1. The environment
We consider an economy populated by a continuum of agents of
two types,
types 1 and 2, where pi denotes the exogenously given
proportion of type i
agents. Agents of each type can produce only one of the two
divisible goods in
the economy. In order to provide a simple motivation for
exchange, we impose
8 Krugman (1981) shows that trade may lead to lower welfare if
both countries are
sufficiently different in terms of the distribution of factor
endowments. This occurs because
of Stolper-Samuelson effects in which the scarce factors in each
country lose from trade. In
contrast, we show that open markets can lead to lower welfare
when both countries are
sufficiently similar. This takes place because too many high
productivity individuals target
the foreign market for production rather than the home country.

2015 17:06:00 UTC
that individuals cannot produce the good that they consume and
therefore
must enter a decentralized marketplace to search for appropriate
trading
partners. If an agent finds a suitable partner, they bargain over
the quantities
exchanged. After reaching an agreement, they immediately
produce and con-
sume and then exit the economy to be replaced immediately by
an identical
pair.9 Finally, time is continuous and p > 0 represents the
discount rate.
Upon consumption, agents obtain utility u(q) such that u'(q) > 0
and
u"(q) < O. In contrast, production results in the loss of utility
given by cost
ci(q) in which
ci(q)
> 0 and
ci'(q)
> 0. In addition, we assume that one of the
inequalities on the second derivatives of the utility or cost

functions strictly
holds and that there exists a qi such that u(i) = ci('i).
Furthermore, the
marginal costs of production are such that c' (q) = c'(q) < ?'(q) =
c'(q). Thus,
type 1 agents produce good 1 at a lower marginal cost than type
2 individuals.
We now formalize the description of the search and bargaining
process and
outline the requirements for the steady-state equilibrium. We
derive the equili-
brium in two steps. First, taking the quantities exchanged
between agents as
given, we derive the expected lifetime utilities for each type of
agent. Second,
taking the expected lifetime utilities as given, we derive the
outcome of the
bargaining process that determines the quantities to be
exchanged in each
match. We conclude this section by characterizing the steady-
state equilibrium
under autarky.
3.2. Asset value functions
In deriving the asset value function of a type i agent, vi, we
first assume that all
matches between appropriate partners result in a successful
bargain with qi units
of good i exchanged for qj units of good j.1 The type i agent
will then receive a net
instantaneous utility u(qi) -
c,(qi)
and exit the economy, forfeiting vi in future

periods. Thus, the net change in utility from a match is [u(qj) -
c(q,q)
- vi]. Given
this outcome, the asset value functions of agents will depend on
the likelihood
they will find a suitable match.
In the decentralized marketplace, we normalize the flow
probability of
matching to one. The probability of matching with an
appropriate trading
partner depends additionally on the proportion of such partners
in the market-
place, py. The flow value of a type i agent is given by
9 Masters (1998) also assumes that agents immediately exit the
market after trading. In an
alternative setting, agents could remain matched for a period of
time until detachment
occurs. Therefore, there will be an endogenous distribution of
matched and unmatched
individuals. Assuming that agents immediately exit the market
after matching makes the
analysis more tractable, since all agents in the market are
unmatched. Alternatively, we
could assume that both goods are completely durable. In this
case, agents would choose to
permanently exit the market after trading occurs.
10 As we are concerned only with steady-state equilibria, we
assume that the traded quantities
and asset value functions are constant over time. We provide a
formal derivation of the
asset value functions in the appendix.

2015 17:06:00 UTC
PVi = pij[u(qj) - ci(qi) - vi]. (1)
Therefore, the flow value is the expected net surplus from
trading with
other agents in the market. With flow probability pj, agent i will
meet
and trade. For example, if the economy is relatively more
populated
with type 1 agents (pL1 > 0.5), they will incur a longer delay
until matching
occurs.
3.3. Bargaining
In the decentralized market, agents will meet and bargain with
appropriate
trading partners. Agents engage in a bilateral Nash bargaining
game in which
an individual's threat point is his expected utility from
remaining in the market
and is taken as given. This problem is
max [u(q2) - Cl(ql) - vl][u(ql) - c2(q2) - v2], (2) ql,q2
subject to the participation constraints:
u(q2) - cl (ql) _
v

u(ql) - c2(q2) ? V2.
For an interior solution in which the participation constraints do
not bind, the
first-order conditions are
u'(ql)= c(q2)j C(ql) (3) ?u'(q2))
I
q , cq u(ql) - Vc2 2) - (4)
u'(ql) =
cl'ql).u(q2)-
cl(ql) - 1 (4) -u(q2)- ci(ql)
-
v1
By (3), we can express q2 as a function of q1. In general, the
quantities
exchanged are functions of the parameters of the cost functions,
as well as the
agents' threat points. In particular, we observe
oqi(vi, vj) qi(vi, vj) >
.
< 0 ;
> 0.
dvi dvi
Thus, as an agent's threat point increases, the terms of trade he
receives in the
match, pi = qj/qi, improves as he produces less while his partner

produces
more. Additionally, changes in the relative threat points of
agents will also
alter the total surplus received by the two agents. This is in
contrast to much of
the existing literature in this area, in which matched agents
jointly produce an
exogenous level of output while bargaining only determines the
division of
output (surplus from matching) (see Casella and Rauch 2002;
Davidson,
Martin, and Matusz 1987, 1991, 1999).
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3.4. Equilibrium
We now combine the results of the two preceding sections and
characterize the
equilibrium for the autarkic economy. Restricting our attention
to interior
solutions in which the participation constraints, given in (2), do
not bind, the
autarkic steady-state equilibrium is formally defined as follows:
DEFINITION 1. The autarkic steady-state equilibrium is a list
(qi, vi) for all i E
{1,2} such that (qi, vi) satisfy:
(i) the returns to search, (1)

(ii) the bargaining conditions, (3) and (4).
After imposing the equilibrium requirements, (1) along with (3)
and (4)
provide solutions for equilibrium variables. In what follows, we
characterize
the autarkic equilibrium that allows us to highlight the central
features of our
framework. In particular, we emphasize how differences in costs
and propor-
tions across types give rise to a pricing distortion in the
economy.
3.4.1. Equilibrium quantities
After imposing the equilibrium requirements, we obtain the
following:
PROPOSITION 1. Assume that u(q) = q and ci(q) = ciq2. For all
ci E (0, 00), the
quantities exchanged in the autarkic equilibrium are uniquely
determined and given by
q(cl, A) = (1/2cl)A ; q2 = (1/2c2)(1/A) (5)
where
F(ci
)
(3p+ (1 I ) 1/3
c2 3p + (2 - pt)
Additionally, these quantities define the terms of trade:
Pi = q2/ql = (Cl/C2)(l/A2) = (l/P2).
By (5), qi can be decomposed into two terms. The first term,

(1/2ci), provides
the quantity of good i that would be produced if types were
identical in costs
and proportions:
cl
= C2 ; Al = l2 = (1/2) = A = 1, qi = (1/2ci).
Importantly, when agents produce quantities qi = (1/2c;), they
will maximize
their total surplus from the match. However, if agents are not
identical, the
total surplus will not be maximized, since one of the agents will
possess a
relative advantage in bargaining. This advantage is
encompassed by the second
term, A, and derives from a relative cost advantage and/or a
relative matching
2015 17:06:00 UTC
advantage. For A = 1, neither of the agents possesses an
advantage. As A
increases, the terms of trade received by type 1 agents decline.
In particular, for
A > 1 (A < 1), type 2 (1) agents will possess a relative
advantage in
bargaining.

To illustrate how the relative bargaining power is determined,
we initially
consider the case in which A = 1. Next, suppose there is an
increase in t1.
Since agents take their expected lifetime utilities as given,
proportions do not
have a direct effect on the quantities determined by (3). Holding
the quantities
constant, (1) illustrates that when Cp increases, type 2 (1)
agents will find it
relatively easier (more difficult) to meet potential trading
partners and conse-
quently v2 (v1) increases (decreases). This alters the agents'
threat points in
the bargain. As a result, the relative bargaining strength of type
2 agents
increases. The effect on the equilibrium quantities can then be
characterized
as follows:
COROLLARY 1. An increase in the proportion of type i agents
in the marketplace,
pi, unambiguously increases qi, decreases qj, and improves the
terms of trade
received by type j agents, pi=qj/qi.11
Changes in the cost parameters of agents will have more
complicated
effects on the equilibrium quantities, since their impact will
extend beyond
changes in the relative bargaining power of agents. Again,
starting from the
case in which A = 1, consider the effect of an increase in c2.
Holding the
relative bargaining power, A, constant, such a change has no

effect on ql.
However, by increasing the marginal costs of type 2 agents,
lowering (1/2c2),
the increase in c2 has a negative direct productivity effect on q2
which tends
to lower P2. In addition to this direct effect, as type 2 agents
become less
efficient, their relative bargaining strength declines. This
lowers A, decreases
ql, increases q2, and lowers P2. Nevertheless, the negative
direct effect dom-
inates. Thus, while both ql and q2 will decrease, q2 decreases
by proportion-
ally more so that the net effect on P2 is positive. The following
corollary
summarizes these results:
COROLLARY 2. An increase in the costs of type i agents, ci,
unambiguously
decreases the equilibrium quantities produced by both types of
agents while
improving the terms of trade received by type i agents,
pi=qj/qi.12
11 Corollary 1 illustrates that the current framework provides a
result consistent with the
Heckscher-Ohlin Theorem in that countries whose population is
relatively abundant in good
i producers will have a lower relative price for good i in
autarky, pi. However, in the current
setting the effect operates only through the effect of proportions
on relative bargaining
strengths, not through increasing opportunity costs.
12 This effect is consistent with Ricardian trade theory in that,

all else equal, an increase in the
cost of producing good i should raise its autarkic relative price.
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,c2
c2
FIGURE 1 Welfare under autarky
3.4.2. Equilibrium welfare
To complete our analysis of the autarkic equilibrium, we
consider aggregate
welfare in the steady state: W = PIv + (1 - Pl)V2. Using the
analysis above,
aggregate welfare may be expressed as the product of the
expected number of
matches, Pu(1 - p1), and the present discounted utility received
in such matches:
W(ch,c2,, ,A) = 11(1-I1)
?q2(C2,A)-Cl(ql(Cl,A))2+
+ ql(Cl,A)- C2(q2(2(C2, ))2 (6)
P+ (0- PI) P+P1
From (6), changes in costs and/or proportions will have two

distinct effects on
aggregate welfare in equilibrium: a direct effect and an indirect
effect caused by
changes in the relative bargaining power of agents, A.
Using the benchmark case in which A = 1, consider the impact
of an increase in
c2. Holding A constant, with less efficient agents total welfare
achieved by the
economy declines. Figure 1 illustrates this result for a simple
numerical case in
which p = 1/6, p1 = 0.5, and cl = 0.5. The horizontal axis
consists of alternative
values of the cost parameter for type 2 agents. The locus W"*
represents the maximum
welfare available in the economy for each value of c2. Although
potential welfare falls
with less efficient agents, equilibrium welfare falls even more.
This occurs because the
increase in c2 improves the relative bargaining power of type 1
agents (as can be seen
from the higher value of A). Since the terms of trade are
determined inefficiently,
production of good 2 does not fall as much as it should.
Consequently, the market
equilibrium is inefficient in that it does not maximize aggregate
welfare when one of
the agents possesses a relative advantage in bargaining.13
13 An identical analysis can be derived for changes in p1.
Holding A constant, an increase
in p1 will directly decrease aggregate welfare by raising the
amount of time it takes for
type 1 agents to match. By increasing the relative bargaining
power of type 2 agents, welfare
is further reduced.

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In this manner, the welfare analysis serves to highlight the key
differences
between our framework and other random-matching models. In a
labour
market context, Mortensen (1982) and Pissarides (2000)
determine how the
degree of unemployment results from a matching process
between workers and
firms. However, our model departs from the Mortensen-
Pissarides set-up in
significant ways. To begin, in our autarky benchmark, we study
matching
between two groups of individuals who separately produce and
consume. In
addition, the population of each type of agent is exogenous. In
standard search
models of the labour market, the equilibrium number of job
vacancies is
determined by a free-entry condition in which firms continue to
enter the
market until expected profits are exhausted.
Moreover, in our framework, bargaining power affects both the
total sur-
plus (as a result of the output produced by each agent in a
match) and the

division of the surplus (which pins down relative prices). In the
typical
Mortensen-Pissarides model, matches jointly produce an
exogenous level of
output, while bargaining only determines the division of surplus
(which is split
through wages).'1415 As a result of these distinctions, our work
provides
additional insights regarding the interactions between market
frictions and
international trade. For example, Davidson, Martin, and Matusz
(1987,
1991, 1999) extend the Mortensen-Pissarides model to study the
effects of
international trade on unemployment. Since matched agents
always jointly
produce an exogenous level of output, the effects on welfare
would be limited
to the W* locus. By contrast, in our framework, changes in the
relative
bargaining power of agents alters not only the division of
surplus between
agents but also the total surplus available.
Finally, in labour market search models, the degree of
inefficiency may be
relieved when the number of firms is endogenous. For a fixed
number of
vacancies (analogous to the autarky economy), employers may
possess higher
bargaining power than workers. As a result, wages will be
inefficiently low, so
that firms can expect to earn positive profits. Under free entry,
firms would
have an incentive to create additional job vacancies, which
renders it more

difficult for them to hire workers. Consequently, wages increase
and the degree
of inefficiency falls. In our benchmark model under autarky, the
total number
of each type of agent is fixed. As demonstrated above,
differences in produc-
tivity and matching ability generate pricing distortions.
Interestingly, as we
show in section 5, opportunities for exchange across countries
(endogenous
market participation) can exacerbate the pricing distortions
under autarky.
14 The total amount of output can be endogenized by
incorporating capital. In the
standard model, firms rent capital, which implies that a hold-up
problem does not occur. As
a result, the introduction of capital does not affect bargaining.
See Pissarides (2000).
15 Trejos and Wright (1995) construct a random-matching
model of money in which prices
are determined by Nash bargaining. However, in their model, all
agents incur the same
disutility of production and the population of each is symmetric.
As a result, barter
exchange will feature efficient relative prices, since both
individuals have the same
opportunities for trade.
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4. International exchange
Having characterized the autarkic equilibrium, we now turn to
the case of open
economies. We consider a world comprising of two countries,
home (h) and
foreign (f), each of which is represented as a geographically
distinct market-
place. Both countries are endowed with a population of two
types of agents. In
each country, the population mass of each type of agent is equal
to 1. In
particular, agents may choose to search outside of their
domestic market if
they perceive the possibility of improved trading opportunities
abroad.
However, a central feature of our framework is that search is
more difficult
abroad, and thus individuals must weigh any potential benefit
against the
greater difficulties of searching.
We proceed with a formal description of the world economy.
There are four
types of agent differentiated by the type of good they produce
and their
country of origin. We refer to an agent of type ij E { lh, 2h, If,
2f} as one
who produces good i E {1, 2} and is from country j E {h, f}.
When a type 1
agent and a type 2 agent from any country are matched, a
double coincidence
of wants occurs and there are opportunities for mutually

beneficial
exchange. Production results in the loss of utility given by cost
ci,{q) in which
c'(q) > 0 and c.(q)> O0. Furthermore, we assume that the
marginal costs of
production across types and countries are symmetric such that
Clh(q)
= Cf(q) = c(q) < (q) = C2h(q) = c$q). Thus, type lh agents
produce
good 1 at a lower marginal cost than If individuals. Similarly,
type 2 agents in
the foreign market produce good 2 at a lower cost than at home.
In this sense,
the home country has a comparative advantage in good 1, while
foreign has a
comparative advantage in good 2.
4.1. Asset value functions
In this section, we determine the expected returns to search for
each type of
agent in each market. As described above, each individual has a
country of
origin, and the populations of each type are the same initially in
each
country. In addition, the marginal costs of lh and 2f agents are
equal.
Similarly, 2h and If agents produce at the same marginal cost.
Moreover,
since lh and 2f individuals have higher productivity than 2h and
If agents,
they potentially may obtain better terms of trade and higher
surplus from
searching abroad. Thus, there is a large degree of symmetry in
the world

economy. In particular, both lh and 2f agents can have the same
incentives to
seek trading opportunities in their alternative market. Therefore,
we choose
to study a symmetric equilibrium in which the same number of
lh and 2f
individuals search abroad. In particular, we exploit the
symmetry in our
economy by studying activity from the perspective of agents
from the home
country.
We begin our analysis by assuming that a fraction of type 1
agents from
home, 7, search in the foreign market. In addition, the same
fraction of
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type 2 agents from foreign seek trading opportunities in the
home country.
In deriving the value functions, we take the quantities
exchanged between
agents as given. For simplicity, we use lower case letters to
denote the
returns to search and quantities in the home country. For the
foreign
market, we use upper case letters. Specifically, let vii represent
the expected

lifetime utility of a type ij agent from searching in the home
market, while
Vi.
denotes the expected surplus from searching in the foreign
market.
Next, we assume that qlh and q2h are the quantities of good 1
and good
2 produced in a match between two agents from the home
country in the
home marketplace. Similarly, qlf (q2f) is the quantity of good
1(2) produced
by a home (foreign) agent in a match with a foreign (domestic)
producer of
good 2(1) in the home market. In contrast, let Qif and Q2f
denote the
quantities of good 1 and good 2 produced by a type lh agent and
a type 2f
agent in the foreign market.
To begin, we derive the returns to search for a type 1 h
individual. In the
decentralized marketplace of each country, agents randomly
encounter poten-
tial trading partners. Type 1 h agents who choose to remain at
home may trade
with either domestic producers or foreign producers of good 2.
For agents
from the home country who search in their own market, we
continue to
normalize the Poisson flow probability of matching with any
agent to 1. The
flow value of a type 1 agent from home who chooses to remain
in the home
market is

rvlh = [u(q2h) - Clh(qlh) - Vlh] + Y[U(q2f) - Clh(qlf) - Vlh],
(7)
where r = 2p. Thus, the flow value is the sum of the expected
net surplus obtained
from trading with others in the home market.16 With flow
probability (1/2), type
lh agents meet producers of good 2 from home. If agents agree
to trade, the net
gains involve the net utility received from production and
consumption. If trade
does not occur, the lh agent could continue searching in the
home market. Thus,
the net surplus from trading with a domestic producer of good 2
is the net utility
from production and consumption offset by the expected utility
an individual
could obtain from continuing to search. Alternatively, with flow
probability
(y/2), the agent will meet and trade with foreign producers of
good 2.
In contrast to the home country, search in the foreign market is
more difficult
for home agents. Therefore, the flow probability of matching is
lower, / < 1.
For type 1 agents from the home country who choose to search
in the foreign
market, individuals have the opportunity of potentially
obtaining better terms
16 Under the assumption that the fraction, 7, of type lh agents
chooses to search in the
foreign market and type 2f agents choose to search in home, the
population masses of

the three types of individuals searching in the home market will
not in general be the
same. The population mass of type lh agents is (1 - 7), while the
mass of type 2f agents
is equal to y. All of the type 2h agents are assumed to remain at
home. Under these
population masses, the fraction of type 2h agents in home is
equal to 1/2, while the fraction
of 2f individuals is -y/2.
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of trade and more surplus, but will wait longer for matches to
occur17
Consider the flow value of type lh agents in the foreign market:
rV1h = 0(1 - -)[u(Q2f) - Clh(Qlf) - Vlh]l (8)
Thus, lh individuals will incur a longer delay until matching
occurs. This
happens not only because of the inherent difficulties for search
in the foreign
market, but because there are fewer type 2 individuals in the
foreign country
than at home.
For type 2h agents, we also have
rv2h = (1 - )[u(qlh) - C2h(q2h) - V2h]. (9)

In contrast to type 1 agents who remain in their domestic
market, it takes
longer for type 2 agents searching at home to find matches. This
occurs
because of foreign market participation under open markets.
When there is
more foreign market participation, there are fewer type 1 agents
available to
trade with in the home market and there is more demand, since
foreign type 2
agents will also be seeking trading opportunities at home. Thus,
the higher the
degree of foreign market participation (for given quantities), the
lower the
expected lifetime utilities of type 2h agents. As a final note,
given the symmetric
environment, individuals from the foreign country will have a
similar set of
value functions. For example, the asset value function for a type
2 agent from
the foreign country who remains in that market will be the same
as (7). Thus,
the value functions for agents from the foreign country are
omitted.
4.2. Bargaining
In the home market, type lh agents will meet and bargain with
either home or
foreign producers of good 2. As a useful reference we write the
bargaining
problem for matches in the home country:
max [u(q2j) - Clh(qlj) - vlh][u(qlj)
- c2j(q2j) - v2j], (10) qlj,q2j
subject to the participation constraints:

u(q2j) - Clh(qlj) > Vlh
17 Note that we continue to assume that all matches are only
temporary. However, as pointed
out by a referee, it is also reasonable to consider that there are
long-term relationships
between trading partners. In contrast to the current version of
the model, we could follow
Laing, Palivos, and Wang (1995) by asserting that all matches
lead to permanent
relationships. Once matches occur, agents exit the market
forever. If there is a flow
rate of new entrants over time, the population of unmatched
agents would remain constant.
As in Kiyotaki and Wright (1993), owing to constant returns to
scale of the matching
technology, the matching rate does not depend on the number of
individuals engaged
in search activity in each country. One could also follow
standard labour search models by
assuming that agents remain matched until detachment occurs.
This would affect only
the returns to search in each market, but not our main results.
The important aspect of our
framework is that it is more difficult to establish matches in the
foreign market than in
the home country.
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u(qlj) - c2j(q2j) > V2j,
where j {h f}. For an interior solution in which the participation
constraints
do not bind, the first-order conditions may be expressed as
u'(q1j) = (q2) c(qlj) (11)
u(qlj)=ch(qlj)
[u(qlj)
-
c2j(q2j)
- v2j
(12)
[u(q2j)
-
Clh(qlj)
-
VlhJ
By (11), we can describe the outcome of the bargaining process
for each
match entirely in terms of q1j. In addition, as we will
demonstrate below, open
markets will affect agents' outside opportunities, total
production, and relative
prices in each match.
4.3. International equilibrium
Using the intuition outlined above, we now endogenize the

degree of foreign market
participation. We begin by characterizing the motivations for
trade from autarky,
where 7 = 0. Provided that international search frictions are not
too severe, lh and
2fagents will have an incentive to search in their respective
foreign markets to take
advantage of the possibility of meeting with more efficient
partners. However, no
such incentive will exist for If and 2h agents who could only
find less efficient
partners abroad in addition to facing higher search frictions.
Thus, as a result of
the symmetry in the model, we consider a particular
international equilibrium in
which only types lh and 2f seek trading opportunities outside of
their home
countries. In contrast, 2h and lf agents choose to remain in their
domestic markets.
Having described the equilibrium within each marketplace, we
now consider
how the distribution of agents across economies will be
determined by their
market participation choices. To illustrate, consider the decision
of a type lh
agent. The individual takes the returns to search in each country
as given.
Letting 7ih denote the probability that a type ih agent searches
in the foreign
market, the agent selects yih in order to
max Tih Vih + (1 - Yih)Vih. (13)
'Tih
If Vih > Vih, type ih agents will always remain in the domestic

market.
Similarly, if vih < Vih, then the returns to search in the foreign
market are
greater than at home and therefore
"Yih
= 1. However, if Vih = Vih, any Yih E
[0, 1] would solve the problem. We note that yf solves
max yifvif + (1 - Yif) V. (14)
Combining with the earlier results and the symmetry in our
model, we may
define the equilibrium conditions from the perspective of the
home country.
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Restricting our attention to interior solutions in which the
participation con-
straints, given in (10), do not bind, the steady-state equilibrium
is formally
defined as follows:
DEFINITION 2. The symmetric steady-state international
equilibrium is a list:
(qij, QIf, Vih, Vlh, Yih, Tif)

for all i E {1, 2} andj E {h, f} such that (qij, Qlf, vih, V1h, Yih,
'Yif) satisfy
(i) the returns to search, (7)-(9)
(ii) the bargaining conditions, (11) and (12)
(iii) yih solves (13) and 7yifsolves (14)
(iv) 7 Y1h = 2f C [O, 1]; 72h = f = 0.
Condition (iii) simply states that all individuals will choose a
probability of
foreign market participation that maximizes their expected
surplus from trade.
In contrast, condition (iv) imposes a symmetry condition upon
the choice of
market participation. Under the symmetry condition, the most
productive
agents make the same choice about searching abroad, and the
least productive
agents choose to remain in their home markets.
From the perspective of the home country, there is a total of six
endogenous
variables to solve for: (i) the quantities traded in domestic
matches, (ii) the
quantities traded in international matches, and (iii) the
endogenous market
participation decisions of type 1 and 2 agents.'8 Our algorithm
for proving the
existence and uniqueness of the symmetric equilibrium begins
by solving for
the quantities traded in international matches.
For clarity, we focus on proving the results using the functional
forms
from proposition 1. Therefore, we have Clh(q) = C2fq) cq2 <

cq2
c2h(q) = Clf(q). As a first step, under open markets, type lh
agents who choose
to remain at home will have the same expected surplus as type
lh agents who
search in the foreign market. By symmetry, 2f individuals
seeking trading
opportunities in the home market will obtain the same expected
surplus as lh
agents who choose to search in the home country. Thus, in a
match between
types lh and 2f, the threat points of the two partners will be
identical. As they
have the same cost functions, neither agent will possess an
advantage in the
bargaining process. Equations (11) and (12) yield
qf = qlf = q2f = (1/2c).
18 Under our equilibrium concept, agents choose a probability
of searching in the alternative
marketplace. With a continuum of agents, the law of large
numbers implies that y also
represents the fraction of agents who seek trading opportunities
abroad. Alternatively,
one could interpret that agents choose pure strategies so that
entry in the foreign market
occurs until expected utility is the same as in the home country.
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--qBR
. .qP (betalow)
qP(betahigh)
7
FIGURE 2 International equilibrium
Therefore, we only have four remaining endogenous variables to
obtain. By the
bargaining condition, we have already shown that q2h q2h(qlh),
SO that there
are three remaining endogenous variables in the system.
We proceed by proving that there are unique values of 7 and qlh
that satisfy the
equilibrium conditions. In the final step, we provide conditions
under which type
2h agents choose to remain at home, so that -Y2h = 0. Given the
outcome of the
match between lh and 2fagents, the market participation
condition that vlh = V1h
can be expressed in terms of / and the remaining endogenous
variables 7 and qlh:
Vlh(7, qlh)= Vlh(Q; P). (15)
Hereafter, we refer to this condition as the 'participation
condition.' The combi-
nations of y and qlh that satisfy it make up the participation
locus. Thus, we
denote qP(y; /) as the value of qh where type lh agents who
remain at home

achieve the same level of expected lifetime utility as type 1 h
agents searching in the
foreign market. Please refer to figure 2, where the participation
locus is depicted.
The properties of qP(y; P) are easily derived in the appendix.
First, the participa-
tion locus is upward sloping. Holding / constant, as - increases,
type lh agents
find it easier to meet partners in the home market than in
foreign markets. As a
result, Vlh increases relative to Vlh. In order for agents to
remain indifferent
between search in the home market and abroad, qlh must rise to
lower vlh to the
level of Vlh. Second, qP(y; /) is decreasing in /3. Holding
- constant, as /3 increases,
search in foreign markets becomes easier and V2h must
increase. In order to
maintain the equality, type lh agents who remain at home must
be compensated
by improved terms of trade in domestic matches and qlh must
fall.
We next consider the bargaining game between two domestic
agents. The
outcome of the bargaining process will be determined by the
threat points of
the two partners. It can then be characterized by
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qlh = lh(Vlh(Y, qlh), V2h( Y, qlh)) that solves (12) and strictly
satisfies the
bargaining participation conditions in (10).
For any -, let qBR(y) denote the value of q1h that solves the
above condition.
We refer to this condition as the 'bargaining condition' and refer
to combina-
tions of -y and qlh that satisfy it as the bargaining locus. We
illustrate a specific
example in figure 2.19 It is easily shown that the bargaining
locus is downward
sloping. As y increases, the resulting change in proportions in
the market
causes Vlh to rise and V2h to fall for any qlh. The increase in
the threat point of
type lh agents improves the terms of trade that agents receive in
a match. As a
result, qBR must fall which means that the bargaining locus is
downwards sloping.
Using these results, an international equilibrium will then
require:
qBR(_)= qP(Q; P). Guaranteeing the existence of an interior
equilibrium in
which y e (0, 1) and the 2h and if agents choose to remain in
their domestic
markets requires additional restrictions on costs and /. Based on
our analysis,
we have the following proposition:
PROPOSITION 2. Provided that/3 E (0, ), as defined in the
appendix, there exists

a unique equilibrium in which
(i) qf = (1/2c)
(ii)
,y(/)
E
(0,1), Y'(O)
> 0
(iii)
q'lhh()
<
0.
Proof. See appendix.
In order to establish the existence of an equilibrium in which
only the lh
agents choose to search in the foreign market, we need two
important condi-
tions. First, we need sufficient incentives for the lh individuals
to seek trading
opportunities in the foreign country. Depending on the degree
of cost differ-
ences between lh and 2h agents, lh individuals will search
abroad if search
frictions are sufficiently low (/ > /, where / is an increasing
function of (c/T)).
If c is not much lower than c (/ higher), then there is little
benefit from
matching with foreign trading partners. Thus, if / > /3, existence
of the equili-
brium is guaranteed by the fact that

qBR(y = 0) > qP(7
= 0; 3).
This relationship captures that starting from autarky, lh
individuals could
obtain higher utility from searching in the foreign market than
at home.20 At
higher values of y, lh individuals will have more bargaining
power than in
autarky, since there are fewer potential trading opportunities
available to
19 Unless otherwise stated, we use the following benchmark set
of parameters: p = 1/6,
c=.5, and T=1.
20 Note that qBR (_y = 0) is simply the autarkic quantity of
good 1 produced in home.
2015 17:06:00 UTC
domestic producers of good 2. Eventually, the gains from search
in the foreign
market will be the same as the returns to search at home. The
second condi-
tion, /3 < establishes that only the productive agents search in
the foreign
market for trading opportunities. Since foreign search is

guaranteed to be
sufficiently difficult, 2h agents will choose to remain at home
rather than
look abroad. We therefore have that a symmetric international
equilibrium
exists and is unique.21
Figure 2 also demonstrates the effect of an increase in 3 on
equilibrium
outcomes. As discussed above, while the qBR locus will remain
unchanged, the
qP(-y; /) locus will shift downwards. As illustrated, qlh will
decrease while 7 will
increase. The intuition is straightforward. When search in
foreign markets is
easier, more agents will seek trading opportunities abroad.
Consequently, the
domestic terms of trade favour lh agents, since it takes less time
for them to
find matches than 2h individuals.
5. Welfare and trade policy
We now turn to a consideration of aggregate welfare. In
particular, we are
interested in examining how welfare varies with the level of
foreign
search frictions, 3, and the corresponding implications for trade
policy. Using the symmetry properties, global welfare may be
expressed as
W = [(1 - ')Vlh + 7V1h + V2h]. Imposing the equilibrium
requirement that
vlh = Vlh provides
W(3) = Vlh(/3) + V2h(0). (16)

Consider how an increase in / affects equilibrium welfare
OW OVlh OV+2h
As argued in the preceding section, the effects of the increase
on the individual
types of agents are unambiguous:
OVlh/la > 0 > Ov2h/0/.
This result is certainly not unique. In any standard model of
trade, a movement
from autarky to trade will increase the welfare of exporters and
harm import
competing sectors. However, unlike the situation of standard
models, the net
effect on welfare will not necessarily be positive. The increase
in /3 will have
21 It may be possible that other asymmetric equilibria exist in
which only some types
from each country choose to search in the foreign market. For
example, it is plausible that
a large number of type lh agents would choose to search in the
foreign market, while
only a small group of type 2f agents seek trading opportunities
in the home country. We
chose to focus our attention on a symmetric equilibrium because
we believe it is the
most robust and the most tractable. Furthermore, we only claim
that the equilibrium we
study is unique among the class of symmetric equilibria.
2015 17:06:00 UTC

a)
CD
tP
FIGURE 3 Effects of foreign search frictions on welfare
two distinct effects: a terms of trade effect, q'lh(/) < 0, as well
as an effect on
the composition of the market, -y'(3) > 0:
OW Ovlh +92h 91+ Vh OV2h <
- qh(0)
h Oqlh+
/() -
>0.
Figure 3 illustrates the net impact. For initially low 0 and
correspondingly
small y, welfare is improving as the economy benefits from
trade with the
efficient type 2f agents. As the proportion of agents who move
between
countries is small, there is little impact on the composition of
the market or
the relative bargaining strengths. However, as 3 increases, the
changes in the
proportions of agents in the market result in increasing gains to
the bargaining

strength of the type lh agents. The negative welfare effects from
the price
distortion begin to dominate the positive effects of more
efficient matches, so
that welfare eventually declines. For sufficiently high values of
3, welfare is
lower under international trade than under autarky.
Nevertheless, this finding will not always occur. The net result
depends on
the relative magnitudes of the bargaining power effect (an anti-
competitive
effect) and the traditional gains from trade coming from the
efficiency of
foreign matches (an output creation effect). When cost
differences between
agents are large under autarky, open markets will cause
relatively large move-
ments of agents between countries. Consequently, the pricing
distortions
become more severe, since large changes in relative bargaining
power occur.
In this manner, for low levels of foreign search frictions,
welfare reductions are
more likely with large cost differences. Figure 4 illustrates this
result.
2015 17:06:00 UTC

c> 0<
co c2low
(rr b -?.-c2high
cu
FIGURE 4 Welfare gains from foreign matching
The degree of relative search frictions in the foreign market
may be inter-
preted in a number of ways. One might infer that 3 reflects
differences in
languages or cultural barriers to trade. In that sense, 3 is
somewhat arbitrary
and cannot be relevant for the discussion of trade policy.
However, many
difficulties encountered by agents in international markets can
be seen as
explicit policy decisions. For example, they may represent
different types of
non-tariff barriers. In particular, these policies restrict
information about trading
opportunities. Since we demonstrate that trade may be welfare
reducing, govern-
ments have incentives to restrict trade through increasing
market frictions.
We next examine the globally optimal volume of trade flows
between coun-
tries by studying the planner's choice of foreign market
participation. In our
setting, the planner must take the degree of search frictions in
each country as
fixed, but is able to choose 7 to maximize global welfare. Using
the symmetry

properties, global welfare may be expressed as W = [(1 -
•y)v•h
+ ~yVlh + V2h.
Importantly, owing to the highly decentralized notion of
exchange, the planner
is able to choose the degree of foreign market participation, but
the quantities
traded in each match result from bargaining. Essentially, the
planner chooses y
as opposed to the case in section 3 where it results from
individuals' decisions.22
In this manner, we can compare the planner's solution with the
equilibrium degree
of foreign market participation. If the planner's choice is higher
than in equilibrium,
trade takes the world closer to the global optimum.
Alternatively, if the equilibrium
degree of market participation is significantly larger than what
the planner obtains,
trade can actually move the world farther away from the global
optimum.
22 Another alternative would be to allow the planner to choose
both the degree of market
participation and the quantities in each match. If the planner
could choose the quantities
traded, he could also act as a Walrasian auctioneer. This would
imply that the planner is
not subject to the trading frictions in the economy. However, we
intend to study
international trade from the perspective of a matching process.
Therefore, we focus on the
case where the planner is constrained by the results of

bargaining in the economy.
2015 17:06:00 UTC
Equilibrium
Planner
Autarky
FIGURE 5 Planner's choice of market participation (clow = .5)
In our framework, trade will generally be socially inefficient.
When the most
productive individuals in each country choose whether or not to
search in the alter-
native market, they affect the frequency of matching and
relative prices in each
country. On the one hand, if more of the productive individuals
choose to search in
the alternative market, social welfare is improved, since
international matches provide
the highest surplus to type lh and 2fagents. On the other hand,
the low productivity
agents in each country are worse off, since it becomes more
difficult for them to trade
and their bargaining power falls. Simulation results provide the
following insights:
1. If foreign search frictions are sufficiently severe, it is likely
the planner

would choose more foreign market participation than in
equilibrium. In
this case, open markets lead to some foreign market
participation, and
international trade moves the world closer to the global
optimum.
2. If search frictions are not much higher in the foreign market
than in the
home country and cost differences between agents are relatively
large ((c/l)
is low), international trade moves the world away from the
global optimum.
We illustrate these results in figures 5 and 6. In figure 5, we use
the same set
of parameters as in our earlier calculations. In particular, we
assume that
(c/-) = 0.5. When search frictions in the foreign market are
much higher
than at home, the planner's degree of foreign market
participation is higher
than in equilibrium. In this case, individuals do not take into
account that
searching in the foreign market would increase the number of
matches with
foreigners in the other country. In contrast, when the expected
returns from
search in the foreign market are higher (0 closer to 1), agents
who leave their
home countries do not take into account that the remaining low
productivity
agents find it much more difficult to trade and have much lower
bargaining
power. Consequently, the equilibrium degree of market
participation may

2015 17:06:00 UTC
Equilibrium
Planner
......
Autark
• , • ..: _ __ ...,._ _• •. • : ...........
-•:'•:•
FIGURE 6 Planner's choice of market participation (clow = .75)
become significantly higher than the planner would want. In
fact, trade may be
more inefficient than autarky so that open markets move the
world farther away
from the global optimum. Figure 6 illustrates an alternative
setting where cost
differences are lower, (c/p) = 0.75. As the figure shows, trade is
much more
likely to move the world closer to the global optimum when c is
closer to c.
At this juncture, we can compare the effects of policy that
emerge from our
model. On the one hand, 0 may be an explicit policy variable
such as non-tariff

barriers. In this sense, such policies would be designed to limit
the amount of foreign
market participation indirectly through the degree of search
frictions. Alternatively,
the planner's choice of "y
could be viewed as describing the impact of a different
policy instrument, the degree of market entry. In this setting,
the level of search
frictions incurred by foreign firms is exogenous and beyond the
scope of government
intervention. The planner's solution could be the result of policy
coordination on
export restraints or the amount of foreign direct investment. In
either case, our
results do not suggest that countries should prohibit trade
entirely - instead, we
show that global welfare could be improved upon through
policy coordination to
determine the appropriate degree of market access across
countries.
We conclude by discussing the role of policy in our framework
compared with
previous work in international trade. As in the new trade
literature, the justifica-
tion for trade policy stems from imperfections in the domestic
economy. Under
open markets, the low-productivity agents face less favourable
opportunities for
exchange. Consequently, they encounter a weaker bargaining
position in
matches. For these reasons, we illustrate that trade policy can
be welfare enhan-
cing. However, this may be a second-best tool for dealing with
the domestic

distortion.23 A direct method of intervention may be more
efficient. In contrast to
23 See Helpman and Krugman (1994). As an example, tariffs
can raise welfare in the
segmented markets approach of Brander and Krugman (1983).
Nevertheless, a production
subsidy would be a better instrument for alleviating the pricing
distortion from imperfect
competition.
2015 17:06:00 UTC
trade restrictions, the government could attempt to give the
disadvantaged agents
higher bargaining power. In this manner, domestic policy would
correct for the
enhanced monopoly power of high-productivity individuals.24
6. Conclusions
This paper studies the impact of incomplete information on
international trade.
Specifically, we depart from traditional market clearing models
by considering
that exchange results from a search and matching process.
Given the bilateral
aspects of exchange between agents, the standard notion of
price-taking behav-

iour no longer applies. In this manner, our approach
complements the recent
trade literature, which emphasizes pricing distortions from
imperfect competi-
tion. In particular, in our framework, pricing distortions
naturally arise, owing to
the decentralized aspects of exchange; each individual in a
match has a degree of
monopoly power, since the terms of trade are determined by
bilateral bargaining.
Interestingly, through these channels, we provide conditions
under which a
movement from autarky to open markets may lower global
welfare. In contrast
to the existing trade literature, we also illustrate how the degree
of information
frictions and comparative advantage affect optimal trade policy
through deter-
mining the appropriate degree of market access across
countries. Future work
that explicitly accounts for tariffs and other trade policies will
provide further
insights into the role of information frictions for international
trade.
Appendix
A.1
We derive the asset value functions in the autarkic economy. In
describing the
evolution of the expected lifetime utility of a type i agent, we
let vi,t denote the
asset value function for a type i agent at date t, given a time
path for the
quantities exchanged between agents, ql,t and q2,t. Following
Trejos and

Wright (1995), we initially consider time in discrete units with
length 0 > 0.
During such a period, the probability that a producer of good i
meets exactly
one good j producer is approximately p10.
When such a match occurs, the type
i agent receives net utility
ri,ti (qj,t+O
-
ciqt+)
, and immediately following
consumption the agent exits the economy and is replaced by an
identical agent.
The probability that he will meet more than one good j producer
will be given
by o(0), where limooa(O)/O = 0. Finally, the probability that he
does not meet
an appropriate trading partner is then approximately (1 - Aj0),
in which case
the agent continues on to the next period with an expected
lifetime utility of
24 This idea follows from Hosios (1990). In a labour market
context, he shows that a
decentralized equilibrium can be efficient if the worker's share
of bargaining power is equal
to the elasticity of the matching function. See also Pissarides
(2000).
2015 17:06:00 UTC

vi,,+o. We may thus define the asset value function for a type i
agent at time t,
given a time path for ql,t and q2,t as
1
vit =
p (•jOUi,
t+O (1 - pjO)vi,t+ + U(0)}, (Al)
where p > 0 is a time discount parameter identical for both
types of agent. The
expression for the asset value function in the steady-state
equilibrium shown in
(1) is then obtained by collecting terms in (Al) and taking the
limit of both
sides of as 0 -+ 0.
A.2
In this section, we provide an explicit derivation of the
symmetric economy
equilibrium conditions. We begin by deriving the properties of
qP(y; /3) and
qBR(7). First, note that by (11), we may write both q2j and Q2f
as functions of
qlj and Qlf. Next, define: 61h = 1/[r + (1 + 7)]; 61f = 7/[r + (1 +
7)];
Alh = 3(1 - y)/[r + 3(1

- -y)]. Also, let ulh(qlh) = 2h(qlh) - Clh(qlh)2;
Uif(qlf)= -- qqlf)- Clh(qlf)2. The functions Ulh and U2h are
defined in a similar
manner. Next, define Ql as the quantity of good 1 produced by a
type if agent
in the foreign market in a match with a type 2h agent. Finally,
equilibrium
requires
vlh(7, qlh, qlf)
= V1h(7, Qf; P) (A2)
V2h (7, Qf; ) < V2h(7, qh). (A3)
Next, we derive the properties of qP(-y; /) and qBR(y). Since q
I f Q = (1/2c),
(A2) defines qP(7; P):
6lh(Y) [q2h(qP (y; 0))
- c(qP(2y; 3))2]
+
6lf(~Y)U1f = Alh(Y; )Ulf (A4)
qP (Y;
/30)
(1
(q2h(l_( Alh)AM
-+=3
qlhh J61h + ( > 0, (A5)
7y 8c2 q3 3h 61h
where - = (1/2c)(c/)1/3. The effects of/3 can be derived in a

similar manner.
Similarly, imposing qlf = q2f = (1/2c), (12) defines the implicit
function qBR(y)
as
qBR 1)
-
- 61h7Y))U1h (BR)
_ If7) i1f
2c)
[
(I -
62h(7))l2h(qBR
'
Differentiation demonstrates that qBR(7) is decreasing in y.
A.3
We derive the results of proposition 2. We first assume an
interior equilibrium
exists. Equilibrium requires qP(Qy; /3) = qBR(7); using the
properties of qP and
qBR provides
2015 17:06:00 UTC

()
qP FqP (qBR 0-1
OqBR 07y qP fy
9qP
q'(B)
_
6
> 0.
We now derive restrictions on 3 that guarantee the existence of
an equilibrium
in which y E (0, 1/2) and 2h individuals choose to remain at
home. Denote 3 as
the value of 3 where y = 0 is an equilibrium. Impose -y = 0 on
(A2) and (12).
Then (12), evaluated at 7
- 0, provides qlh - q such that Ulh(() = cq2. Using
this result and evaluating at y = 0, (A2) yields 6lh(7 = O)ilh(q)
+ 6f(7y = 0)
Ulf
=
Alh(7 = 0; /3)ui.
We then have:/3 r(c/-)23/[r + (1 - (c/-)2/3)], where
(c/ )2/3 e (0,1). To demonstrate that ~ < 1/2, we can express
(A4) as:
UIA(q)- {[Alh(Y; 3)

-
61f(7)]/61h(7y)}1f. Using this expression, (10) requires:
Ulh(qlh) - Vlh (r//3){[3(1
- 7) - ]/l[r + 3(1 - 7)]}iuf > 0. Thus, we need
7 < [3/(3 + 1)]. Evaluating at 3 = 1 implies -y < 1/2.
Furthermore, as we
restrict /3 such that 3 < 1 we have y < 1/2.
Finally, we place an upper bound on / to ensure that types 2h
and if do not
choose to search abroad in equilibrium, which requires from
(A3) that
V2h
7 Qlf;i3) V2h(7, qlh). Thus,
for 3 -/, the restriction is satisfied.
However, as p increases, proposition 2 provides that y is
increasing, while q1h
decreases. Both of these effects lower V2h. For sufficiently
high 3, type 2h agents
would have an incentive to move between markets because (i)
foreign search is
easier and (ii) as increases in /3 also increase -, their potential
bargaining strength
in the foreign market must be increasing as the proportion of
good 2 producers
in the foreign marketplace is decreasing and the proportion of
potential partners
in the marketplace is increasing. Although analytical results are
intractable, we
can define an upper bound on 3 as follows. Using the
equilibrium results, we
may express the asset value functions and traded quantities as

functions of /3 and
the cost parameters. We can define 03(c, -) as a function of the
cost parameters
such that in equilibrium: V2h(/3, , c) = V2h(C, C); Vh(Y, C, -)
= V1h(P, C,) with 7
E (0,1/2) and 2h agents remain at home. One set of parameters
that will solve
this condition is /3 = 1 and c = c. In this case, y = 0 in
equilibrium, since all
agents will be identical and have the same trading opportunities.
Under higher
values of T, all agents will have lower expected lifetime utility,
but the asset
values of the efficient agents will fall more. However, as /3 = 1,
2h agents would
also begin to move to offset any differences in their expected
lifetime utilities.
Such movements could be deterred if /3 were lower. Thus, given
costs, we can
define 3 as the value of / which in equilibrium solves V2h (3, C,
-) = V2h (C, -), and
the above arguments guarantee that there exists such a p < 1.
2015 17:06:00 UTC
References
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2015 17:06:00 UTC

http://www.jstor.org/page/info/about/policies/terms.jspArticle
Contentsp. [516]p. 517p. 518p. 519p. 520p. 521p. 522p. 523p.
524p. 525p. 526p. 527p. 528p. 529p. 530p. 531p. 532p. 533p.
534p. 535p. 536p. 537p. 538p. 539p. 540p. 541p. 542p.
543Issue Table of ContentsCanadian Journal of Economics, Vol.
39, No. 2 (May, 2006), pp. 375-641Front MatterViewpoint: The
Economics of Hunter-Gatherer Societies and the Evolution of
Human Characteristics [pp. 375-398]Output and Wages with
Inequality Averse Agents [pp. 399-413]Social Interactions in
Small Groups [pp. 414-433]Financial Innovations and
Managerial Incentive Contracting [pp. 434-454]Network
Externalities, Discrete Demand Shifts, and Submarginal-Cost
Pricing [pp. 455-476]Rebates as Incentives to Exclusivity [pp.
477-492]Preferential Trade Areas, Multinational Enterprises,
and Welfare [pp. 493-515]Decentralized International Exchange
[pp. 516-543]The Adjustment of External Tariffs in the Kemp-
Wan-Grinols Compensation Scheme [pp. 544-563]Product
Standards, Trade Disputes, and Protectionism [pp. 564-
581]Labour Force Ageing and Productivity Performance in
Canada [pp. 582-603]The Politics of Pollution: Party Regimes
and Air Quality in Canada [pp. 604-620]Political Uncertainty
and Stock Market Returns: Evidence from the 1995 Quebec
Referendum [pp. 621-641]Back Matter
International trade: The oldest specialization in economics
probably has the largest literature. Focus should be on trade
policy, rather than pure economic theory.
Read the attachment “Decentralized International Exchange”.
Then create a topic that based on reading attachment and under
international trade. You cannot just write topic as
“Decentralized International Exchange”. Please create
an easy topic, then I can easy to talk this to my classmate.

1. First, let me know your topic and provide an outline of paper
to me. And how are you going to write this paper. Let me know
your ideas to write this paper. (please contact me after you done
this part)
2. Then you can write 8-9 pages’ paper. *Using examples,
graphs and data to prove each of your thoughts into paper. In
the reference citation page, please write complete sources from.
And provide sources under graphs and data in the paper. (please
use simple words and sentences. No complicated and very long
sentences. MLA format. Double space.)
3. Make a 20 minutes PowerPoint of presentation. In the
PowerPoint, include important parts of paper, explains and data
(maybe graph). You do not need write whole sentences into
PowerPoint. Just use short sentences and keywords. In each
slide of PowerPoint, please write speech into “note” section. So
I can know how to present that slide. Make sure all speech can
match 20 minutes. (please use spoken English into speech
rather than very academic English. Make speech easy to talk.
No complicated English)
If you have any questions, please contact me and ask me. I will
reply you ASAP.
Running head: CLASS PIZZA PARTY 1
CLASS PIZZA PARTY 9
Class Pizza Party Justification Report
(Student Name)
ENG 315 – Professional Communications
(Professor Name)
(Correct Date) August 11, 2014

Dr. Annabelle Karnes
Professor of English
Global University
2222 Academic Lane
Riverton, VA 98625
August 11, 2014
Sophia Bailey
3456 Student Drive
Riverton, VA 98625
Dear Dr. Karnes:
I am pleased to present the report you authorized on June 10,
2014, regarding the feasibility of potential pizza options for the
upcoming class party.
An analysis of both Pop’s Pizza Planet and Scooby’s Pizza
Mansion found that, although both alternatives offered delicious
options, Scooby’s Pizza Mansion better met our chosen criteria
in cost, choices, and delivery time. It is therefore the
recommendation that we utilize Scooby’s Pizza Mansion for our
upcoming class pizza party.
Thank you for allowing me the opportunity to research potential
party choices. I appreciate your consideration of my
recommendation. Should you have any questions regarding this
report, please do not hesitate to contact me at (909) 555-5555.
Sincerely,

Sophia Bailey
Enclosure: Justification Report
Table of Contents
Executive Summary 4
Problem Statement 5
Terminology 5
Report Overview 5
Overview of Alternatives 6
Criteria 6
Research Methods 6
Evaluation of Alternatives 7
Findings and Analysis 7
Recommendation 8
References 9
Executive Summary
This report examines the feasibility of two potential pizzeria
choices for the upcoming class party. Methods of analysis
include calls to each pizzeria as well as Internet research to
evaluate menus, delivery times, review customer satisfaction
ratings, and investigate dietary restrictions. The results of the
data show that both examined pizzerias are quality alternatives
with a range of toppings, delivery options, and acceptable
customer satisfaction ratings.
However the report finds that, while both analyzed alternatives
provide similar products and services, Scooby’s Pizza Mansion
most closely meets the criteria presented in terms of overall

cost effectiveness, topping choices, dietary restrictions, and
delivery options. It is therefore recommended that Alternative
B, Scooby’s Pizza Mansion, be chosen as the vendor for the
class pizza party.
Class Pizza Party
Dr. Karnes’ ENG 315 class is gearing up for a celebratory party.
After a long semester of challenging assignments, Dr. Karnes
feels her students deserve kudos for their hard work. She has
decided that a pizza party would best suit the preferences of her
diverse class.
The Justification Report presents the need to determine a
suitable pizzeria to serve as a vendor for the upcoming class
party. It presents the scope of the problem, presents two
potential vendor choices, and evaluates them utilizing five
criteria to best decide which vendor meets the unique needs of
Dr. Karnes’ class. The report does not consider alternate
cuisines but instead focuses on two local pizzeria alternatives
that have been recommended by members of the faculty.
Internet research was conducted as well as personal interviews,
and a final recommendation is provided.
Problem Statement
ENG 315 has a (wonderful) problem: A pizza party is in order
(after all, ENG 315 students are the BEST students in the
WORLD, and they all LOVE pizza). Unfortunately, the
instructor cannot decide which local vendor to order pizza from.
All of the vendors attempt to tantalize her with the promise of
coupons, unique ingredients, speedy delivery times, “extra”
deals, and more. How is she to choose? Her twenty three
students all have gourmet taste buds, some have unique dietary
needs, and to complicate matters, she has…well, a teacher’s

budget of $45.
Terminology
“Pizza-Pizza!” or “BOGO [Buy One Get One]” – a sales
promotion wherein the consumer gets two pizzas for the price of
one.
“Gluten-Free” – a product that does not contain gluten, a
protein composite found in certain foods that spurs an allergic
reaction in some consumers.
Report Overview
This report was created to help the indecisive Dr. Karnes choose
the best pizza for a party in her ENG 315 class. Dr. Karnes
tasked this group to investigate two alternatives to determine
the best food recommendation for the party. The two vendors
researched were Alternative A (Pop’s Pizza Planet) and
Alternative B (Scooby’s Pizza Mansion). Dr. Karnes’ criteria by
which to judge the alternatives were as follows: cost, sales
promotions, topping desirability, gluten-free options (since two
class members are allergic to gluten), and delivery time.
Research methods included calls, Internet research (for coupons
and online menus), student surveys (to determine preferences),
and in-person visits to both places of business. An evaluation
of the two alternatives revealed that Alternative B, Scooby’s
Pizza Mansion, should be recommended, since it offered three
advantages that Pop’s Pizza Planet could not: pizzas with a
gluten-free crust, one unique gourmet topping that the class
preferred (ghost peppers), and a “Zoinks! Pizza-Pizza!”
weeknight pizza deal.
Overview of Alternatives
The following two alternatives considered in this report meet
Dr. Karens’ criteria:
Alternative A – Pop’s Pizza Planet: Located on the corner of
Saturn Drive and Mars Avenue, Pop’s Pizza Planet is a new
establishment gaining a reputation for gourmet pizzas with

clever names like “Pop’s Plutonian Pepperoni” and “Meatball
Meteor Shower.” Pop’s Pizza Planet features brick-oven pizzas
that can be delivered in 45 minutes or less. Gourmet pizza
toppings include Venus’s Vidalia Onions and Supermassive
Black Hole Olives.
Alternative B – Scooby’s Pizza Mansion: Located on the corner
of Mystery Avenue and Meddling Kid Blvd, Scooby’s Pizza
Mansion is a 14-year old restaurant that boasts fiendishly
delightful unusual gourmet toppings, a local favorite being the
cheese-fried ghost peppers. Pizza is delivered in a “Mystery
Machine” in 25 minutes or less. Kids get a complimentary
gluten- and nut-free “Scooby Snack” with meals. Finally, a
“Zoinks! Pizza-Pizza” BOGO deal is offered Monday through
Thursday (no coupon needed).
Criteria
Dr. Karnes stressed that following five criteria would be used to
judge the feasibility of each alternative:
1. Cost – How much will the pizzas cost? Dr. Karnes said she
did not wish to spend more than $45 for two large, two-topping
pizzas for the class (consisting of 23 students).
2. Sales promotions – What good ones (if any) are running? Dr.
Karnes mentioned that she would privilege an alternative with a
coupon or promotion running.
3. Topping desirability – What types of gourmet toppings are
offered? Dr. Karnes noted that her students all loved unique
gourmet toppings.
4. Gluten-free options – Are there any gluten-free offerings?
Since two class members are allergic to gluten, Dr. Karnes
mentioned that she would prefer an alternative with a gluten-
free crust option.

Week 6 Discussion Putting it All Together - Revising the Justif.docx

Week 6 Discussion Putting it All Together - Revising the Justif.docx

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Week 6 Discussion Putting it All Together - Revising the Justif.docx