Market Penetration Costs and the New Consumers Margin in International Trade

This paper develops a novel theory of marketing costs within a trade model with product differentiation and heterogeneity in firm productivities. A firm enters a market if it is profitable to incur the marginal cost to reach a single consumer. It then faces an increasing marginal penetration cost to access additional consumers. The model, therefore, can reconcile the observed positive relationship between entry and market size with the existence of many small exporters in each exporting market. Comparative statics of trade liberalization predict a large increase in trade for goods with positive but low volumes of previous trade.