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Verti-zontal Differentiation in Monopolistic Competition

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  • Di Comite, Francesco
  • Thisse, Jacques-François
  • Vandenbussche, Hylke

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8752.

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Date of creation: Jan 2012
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Handle: RePEc:cpr:ceprdp:8752

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

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References

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Cited by:
  1. Pierre M. Picard & Toshihiro Okubo, 2011. "Firms Location under Demand Heterogeneity," CREA Discussion Paper Series 11-07, Center for Research in Economic Analysis, University of Luxembourg.
  2. Hylke Vandenbussche & Francesco Di Comite & Laura Rovegno & Christian Viegelahn, 2011. "Moving up the Quality ladder? EU-China Trade Dynamics in Clothing," LICOS Discussion Papers 30111, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  3. Massimiliano Bratti & Giulia Felice, 2012. "Are Exporters More Likely to Introduce Product Innovations?," The World Economy, Wiley Blackwell, vol. 35(11), pages 1559-1598, November.
  4. Jože P. Damijan & Jozef Konings & Sašo Polanec, 2012. "Pass-on Trade: Why do Firms Simultaneously engage in Two-Way Trade in the Same Varieties?," LICOS Discussion Papers 31212, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  5. Francesco Di Comite, 2012. "Measuring quality and non-cost competitiveness at a country-product level," European Economy - Economic Papers 467, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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