Verti-Zontal Differentiation in Monopolistic Competition

54 Pages Posted: 20 Jan 2012

See all articles by Francesco Di Comite

Francesco Di Comite

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN); European Commission, Joint Research Centre, Sevilla; Catholic University of Louvain (UCL)

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Hylke Vandenbussche

Catholic University of Leuven (KUL), CEPR

Multiple version iconThere are 4 versions of this paper

Date Written: January 2012

Abstract

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.

Keywords: heterogenous firms, horizontal differentiation, monopolistic competition, non-symmetric varieties, vertical differentiation

JEL Classification: D43, F12, F14, L16

Suggested Citation

Di Comite, Francesco and Thisse, Jacques-François and Vandenbussche, Hylke, Verti-Zontal Differentiation in Monopolistic Competition (January 2012). CEPR Discussion Paper No. DP8752. Available at SSRN: https://ssrn.com/abstract=1988683

Francesco Di Comite (Contact Author)

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

BU-1 05/190
Brussels, Bruxelles B-1049
Belgium

European Commission, Joint Research Centre, Sevilla ( email )

Call Inca Garcilaso 3
Sevilla, SE 41092
Spain

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Jacques-François Thisse

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hylke Vandenbussche

Catholic University of Leuven (KUL), CEPR ( email )

Faculty of Economics
Naamsestraat 69
B-3000 Leuven, 3000
Belgium
+32 16 326 920 (Phone)
+32 16 326 732 (Fax)

HOME PAGE: https://www.sites.google.com/site/vandenbusschehylke/home-1

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