Verti-Zontal Differentiation in Monopolistic Competition
Francesco Di Comite
Catholic University of Louvain (UCL)
affiliation not provided to SSRN
Université Catholique de Louvain, IRES, CORE, LICOS-KUL and CEPR; Catholic University of Leuven (KUL), LICOS & CEPR
CEPR Discussion Paper No. DP8752
The pattern of trade observed from firm-product-country data calls for a new generation of models. To address the unexplained variation in the data, we propose a new model of monopolistic competition where varieties enter preferences non-symmetrically, capturing both horizontal and vertical differentiation in an unprecedented way. Together with a variable elasticity of substitution, competition effects, varying markups and prices across countries, this results in a tractable model that rationalizes the empirical finding that firm-product quantities show systematically more variability than prices across export destinations. Accounting for unexplained data variation, our model can thus be used to improve demand identification.
Number of Pages in PDF File: 54
Keywords: heterogenous firms, horizontal differentiation, monopolistic competition, non-symmetric varieties, vertical differentiation
JEL Classification: D43, F12, F14, L16working papers series
Date posted: January 20, 2012
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