A simple model of buyer–seller networks in international trade

Abstract

The recent literature on firm-to-firm trade has documented salient empirical regularities of the buyer–seller network. We show that surprisingly many of these regularities emerge by superimposing the stochastic balls-and-bins structure of Armenter and Koren (2014) to firms in a classical Krugman (1980) model. Our approach amounts to a re-interpretation of Krugman (1980) and relies on randomized bundling of Krugman-varieties into heterogeneous firms, economically neutral ‘sales units’ that import foreign varieties but belong to local firms, and a statistical reporting threshold that applies to firm-to-firm transactions. We argue that our model provides an important benchmark for the assessment of theoretical models that aim to identify the determinants of firm-to-firm networks.