Patterns of Bilateral Trade Flows Within the Characteristics Approach to Trade

Recent years have seen the development of intra‐industry trade models based upon the work of Lancaster (1979). Although these models demonstrate the conditions which lead to intra‐industry trade they cannot, in general, predict the direction of bilateral trade flows in the same commodity. Work by Lancaster (1984) and Lyons (1984) identifies two possibilities — the interleaved case (each domestically produced variety is bordered on both sides by a foreign produced variety) and the split case (domestic firms produce on one half of the preference spectrum and foreign firms on the other). Which of the two cases applies is seen as being determined by historical demand patterns. This paper seeks to model these patterns by a simple adaptation of the model of Lancaster (1980).