Macroeconomic Import Functions with Imperfect Competition. An Application to the EC Trade
This paper analyses the consequences for the standard import allocation models of assuming monopolistic competition on the supply side. Together with relative prices, this requires additional variables to capture product differentiation effects. To this end, we derive a composite price index from a nested CES-translog demand system. Our empirical work is twofold: first, we try to assess the long-term relationship between market shares and relative prices by using a cointegration technique, and second, we estimate the demand system for domestic, European and foreign products in the main European markets. The results show that a composite price index, integrating product differentiation, tends to perform better than pure price effects alone in a significant number of cases. We use the estimation results to assess the impact of a potential homogenization of tastes over European markets, after the `1992' integration process.
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