Verti-zontal Differentiation in Monopolistic Competition
Francesco Di Comite
Catholic University of Louvain (UCL)
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre for Economic Policy Research (CEPR)
Université Catholique de Louvain, IRES, CORE, LICOS-KUL and CEPR; Catholic University of Leuven (KUL), LICOS & CEPR
December 10, 2011
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 whose predictions differ from existing ones. Using the population of Belgian exporters, our model succeeds in explaining the hitherto unexplained variation. The implications call for a re-thinking of earlier results and measurement practices.
Number of Pages in PDF File: 56
Keywords: heterogeneous firms, horizontal differentiation, vertical differentiation, monopolistic competition, non-symmetric varieties
JEL Classification: D43, F12, F14, L16working papers series
Date posted: January 30, 2012
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