Horizontal and Vertical Differentiation: Approaching Endogenous Measurement in Intra-industry Trade

The emergence of intra-industry trade has been studied through a fruitful interaction between theoretical explanations and empirical methods. Indicators have been developed to measure the intensity of intra-industry trading, which has led to the rise of theoretical models explaining the determinants of these trade flows. Empirical analyses have debated the need to distinguish intra-industry trade in horizontal differentiation from that in vertical differentiation. The first theoretical analysis of intra-industry trade showed that the determinants and consequences of this type of trade are different, depending on whether the traded products differ in quality. A method exists for distinguishing intra-industry trade between two countries in vertical differentiation from those in horizontal differentiation. This approach has limitations, leading to a need for an alternative method for separating and measuring intra-industry trade into horizontal and vertical differentiation.