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
October 1, 2011
Centro Studi Luca d'Agliano Development Studies Working Paper No. 322
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: 50
Keywords: Heterogeneous ﬁrms, Product, Differentiation, Monopolistic Competition, Nonsymmetric varieties
JEL Classification: D43, F12, F14, L16working papers series
Date posted: March 2, 2012
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