Multi-Product Firms, Endogenous Sunk Costs, and Gains from Trade through Intra-Firm Adjustments

In this paper, I investigate welfare gains associated with trade induced intra-\u85rm ad-justments of multi-product \u85rms. To disentangle the welfare gains, I split up the R&D portfolio of a multi-product \u85rm into three di¤erent channels: i) product innovation, ii) investments in the degree of product di¤erentiation, and iii) process innovation. Trade integration enables \u85rms to exploit economies of scale as innovation requires upfront development costs and encourages \u85rms to spend more on R&D. I derive the indirect utility function and show that consumers bene\u85t from this behavior through a larger product range (love of variety) which is also more di¤erentiated (love of diversity). Furthermore, a larger market is associated with technology upgrading. The resulting cost savings are passed on to consumers, leading to welfare gains from lower prices