In Falvey (1981) and Falvey and Kierzkowski (1987), intra-industry trade with vertical product
differentiation takes place under perfect competition.15 Falvey and Kierzkowski (1987) assume
that the differentiated product sector is of the Heckscher–Ohlin type with constant-returns-toscale
technology identical across countries, but Ricardian in terms of technology, with fixed and
different factor intensities at the variety level; higher (lower) quality variety is produced with
a higher (lower) capital-labor-ratio technology and has a higher (lower) price. Each individual
demands only one type of differentiated product according to the individual’s income, resulting in
an aggregate demand for a variety of quality-differentiated goods. Vertical IIT occurs when two
countries with differences in income distribution have different factor endowments, or different
technologies in the homogeneous product sector.