Verti-Zontal Differentiation in Export Markets
44 Pages Posted: 5 Jul 2014
Date Written: May 13, 2014
Many trade models of monopolistic competition identify cost efficiency as the main determinant of firm performance in export markets. To date, the analysis of demand factors has received much less attention. We propose a new model where consumer preferences are asymmetric across varieties and heterogeneous across countries. The model generates new predictions and allows for an identification of horizontal differentiation (taste) clearly distinguished from vertical differentiation (quality). Data patterns observed in Belgian firm-product level exports by destination are congruent with the predictions and seem to warrant a richer modelling of consumer demand.
Keywords: heterogeneous firms, heterogeneous consumers, product differentiation, asymmetric preferences, monopolistic competition
JEL Classification: D43, F12, F14, L16
Suggested Citation: Suggested Citation