Introducing Monopolistic Competition into the GTAP Model
Abstract1996, October This technical paper documents one approach to incorporating monopolistic competition into the GTAP Model. In this framework, consumer preferences are heterogeneous, leading to an apparent "love of variety" in the aggregate utility function for each region. The more heterogeneous are preferences, the smaller the elasticity of substitution in the aggregate utility function, and the greater the value placed on the addition of new varieties. The same is true for firms, which experience lower unit costs for differentiated, intermediate inputs, as the number of varieties on offer increases. In order to meet the diverse needs of consumers, firms differentiate their products through research and development (R&D) as well as advertising activities. These costs are assumed to be invariant to the total volume of sales for a given variety of product. With production occurring at constant returns to scale, this gives rise to declining average total costs. A zero profits equilibrium in this model is characterized by firms marking up their price over marginal costs by an amount sufficient to cover the fixed costs associated with establishing a new variety in the marketplace. Since the optimal markup is itself determined by the elasticity of substitution among varieties, this establishes a direct relationship between fixed costs and the degree of preference heterogeneity. The main differences between the monopolistically competitive sectors and the traditional GTAP sectors may be summarized as follows: We introduce two new variables: n, the number of firms in the industry and qof, the output per firm. Minimum expenditure and unit costs are declining in n. Average total costs are declining in output per firm. Unlike the Armington specification, foreign and domestic firms compete directly in the representative consumer's utility function. We illustrate this framework with a 2 commodity/3 region example in which we eliminate US antidumping duti
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University in its series GTAP Technical Papers with number 309.
Date of creation: 1996
Date of revision:
Note: GTAP Technical Paper No. 06
Contact details of provider:
Postal: 1145 Krannert Building, West Lafayette, IN 47907-1145
Phone: (765) 494-4267
Fax: 765 494-9176
Web page: http://www.gtap.agecon.purdue.edu/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Joseph Francois & Olga Pindyuk & Julia Woerz, 2008.
"Trade Effects of Services Trade Liberalization in the EU,"
IIDE Discussion Papers
20080801, Institue for International and Development Economics.
- Joseph F. Francois & Olga Pindyuk & Julia Woerz, 2008. "Trade Effects of Services Trade Liberalization in the EU," FIW Research Reports series I-004, FIW.
- Philippidis, G. & Hubbard, L. J., 2001. "The economic cost of the CAP revisited," Agricultural Economics, Blackwell, vol. 25(2-3), pages 375-385, September.
- George Philippidis & Lionel Hubbard, 2003. "Modelling hierarchical consumer preferences: an application to global food markets," Applied Economics, Taylor and Francis Journals, vol. 35(15), pages 1679-1687.
- Pekka Sulamaa & Mika Widgrén, 2004.
"EU-Enlargement and Beyond: A Simulation Study on EU and Russia Integration,"
356, Government Institute for Economic Research Finland (VATT).
- Pekka Sulamaa & Mika WidgrÃ©n, 2004. "EU-Enlargement and Beyond: A Simulation Study on EU and Russia Integration," Empirica, Springer, vol. 31(4), pages 307-323, December.
- Sulamaa, Pekka & Widgrén, Mika, 2004. "EU Enlargement and Beyond: A Simulation Study on EU and Russia Integration," CEPR Discussion Papers 4720, C.E.P.R. Discussion Papers.
- Roberto Roson, 2006. "Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications," Computational Economics, Society for Computational Economics, vol. 28(1), pages 29-49, August.
- Pekka Sulamaa & Mika Widgrén, 2005.
"Economic Effects of Free Trade between the EU and Russia,"
Economics Working Papers
036, European Network of Economic Policy Research Institutes.
- Sulamaa, Pekka & Widgrén, Mika, 2005. "Economic Effects of Free Trade between the EU and Russia," Discussion Papers 969, The Research Institute of the Finnish Economy.
- Swaminathan, Padma V. & Hertel, Thomas W. & Brockmeier, Martina, 1997. "European Union Enlargement: What Are The Agricultural Trade Models Missing?," 1997 Annual meeting, July 27-30, Toronto, Canada 21030, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ginger Batta).
If references are entirely missing, you can add them using this form.