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Vert-zonal Differentiation in Monopolistic Competition

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  • Francesco Di Comite
  • Jean-François Thisse
  • Hylke Vandenbussche

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 whose predictions differ from existing ones. Using the population of Belgian exporters, our model succeeds in explaining the hitherto unexplained variation. The implications call for a re-thinking of earlier results and measurement practices.

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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 30011.

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Date of creation: 2011
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Handle: RePEc:lic:licosd:30011

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Keywords: Heterogeneous firms - Horizontal differentiation - Vertical differentiation - Monopolistic competition - non symmetric varieties;

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References

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Cited by:
  1. Hylke VANDENBUSSCHE & Francesco DI COMITE & Laura ROVEGNO & Christian VIEGELAHN, 2011. "Moving up the Quality ladder? EU-China Trade Dynamics in Clothing," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2011047, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. PICARD, Pierre M. & OKUBO, Toshihiro, . "Firms' locations under demand heterogeneity," CORE Discussion Papers RP -2459, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Joze Damijan & Joep Konings & Saso Polanec, 2012. "Pass-on Trade: Why do Firms Simultaneously Engage in Two-Way Trade in the Same Varieties?," Vives discussion paper series 31, Katholieke Universiteit Leuven, Faculteit Economie en Bedrijfswetenschappen, Vives.
  4. 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.
  5. 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.

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