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Verti-Zontal Differentiation in Monopolistic CompetitionFrancesco Di ComiteCatholic University of Louvain (UCL) Jacques-François ThisseCatholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre for Economic Policy Research (CEPR) Hylke VandenbusscheUniversité Catholique de Louvain, IRES, CORE, LICOS-KUL and CEPR; Catholic University of Leuven (KUL), LICOS & CEPR October 1, 2011 National Bank of Belgium Working Paper No. 216 Abstract: The recent availability of trade data at a firm-product-country level calls for a new generation of models able to exploit the large variability detected across observations. By developing a model of monopolistic competition in which varieties enter preferences non-symmetrically, we show how consumer taste heterogeneity interacts with quality and cost heterogeneity to generate a new set of predictions. Applying our model to a unique micro-level dataset on Belgian exporters with product and destination market information, we find that heterogeneity in consumer tastes is the missing ingredient of existing monopolistic competition models necessary to account for observed data patterns.
Number of Pages in PDF File: 59 Keywords: Heterogeneous firms, Product Differentiation, Monopolistic Competition, Nonsymmetric varieties JEL Classification: D43, F12, F14, L16 working papers seriesDate posted: October 25, 2011Suggested CitationContact Information
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