International Trade with Heterogenous Firms and Asymmetric Product Varieties
Catholic University of Leuven (KUL) MSI Working Paper No. 1005
27 Pages Posted: 15 Aug 2010
Date Written: June 2010
We extend the Melitz-Ottaviano (2008) model by introducing asymmetric groups of varieties in terms of degree of product differentiation. The introduction of these different market segments in the demand system allows us to structurally derive more complex relations between firm productivity, size and markups, which ultimately depend on the degree of product differentiation, for both the closed and open economy settings. The theoretical results are tested at the empirical level by comparing the performance of French wine producers in market segments characterized by heterogeneous levels of product differentiation, defined geographically based on the "Denomination of Controlled Origin" areas.
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