On the size of home bias

Abstract

Home bias in consumption refers to consumers strongly preferring domestic over foreign products. However, if the products were to be differentiated, would there then be a taste for country of origin? If this were the case, what would be the market shares if consumers were to only value prices and characteristics and not the brand’s nationality? Using a structural demand, we account for home bias in the European car market and compute the counterfactual market shares in the absence of home bias.We find that home-biased preferences explain more than half of the market shares of domestic car manufacturers in their domestic markets, limiting the role of trade frictions.