Joseph G. Hirschberg and Jaws R. Dayton

A significant portion of world trade in processed food is increasingly
composed of intra-industry trade (IIT), where IIT is trade between two
countries in products that are close substitutes for each other ( Tharakan
1985 ). A widely studied example of IIT is in manufactured goods, such
as automobiles. Unlike the neoclassical theory of comparative advantage,
where nations with complementary resources trade, Linder ( 1961) has
argued that IIT will be most prevalent between countries with similar
economies.

Recently a number of models have been developed to explain IIT
based on imperfect competition, where economies of scale and imperfect
competition are the most prevalent factors contributing to the
development of intra-industry trade in a particular industry. These
models have been developed in a series of works by Krugman ( 1979,
1981) , Dixit and Norman ( 1980) , Helpman ( 1981) , and Helpman and
Krugman ( 1985) .

Empirical studies of intra-industry have been conducted on a variety
of industries. Greenaway and Milner ( 1986) , Balassa and Bauwens ( 1987) ,
Helpman ( 1987), and Bergstrand ( 1990) investigate the determinants of IIT
in the aggregate and for industrial sectors. Also, recent studies that
investigate IIT in the processed food industry have been conducted by
McCorriston and Sheldon ( 1991) , Hart and McDonald ( 1992) ,
Christodoulou ( 1992) , and Hirschberg, Sheldon, and Dayton ( 1994)
(hereafter HSD).

In this chapter we follow the form of the regression estimated in HSD
to model IIT. Instead of aggregating over all processed food industries

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