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Introducing Monopolistic Competition into the GTAP Model


  • Thomas W. Hertel
  • Padma Swaminathan


1996, 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

Suggested Citation

  • Thomas W. Hertel & Padma Swaminathan, 1996. "Introducing Monopolistic Competition into the GTAP Model," GTAP Technical Papers 309, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  • Handle: RePEc:gta:techpp:309 Note: GTAP Technical Paper No. 06

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    Cited by:

    1. Peter Dixon & Michael Jerie & Maureen Rimmer, 2016. "Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 1-110, June.
    2. Roberto Roson, 2006. "Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications," Computational Economics, Springer;Society for Computational Economics, vol. 28(1), pages 29-49, August.
    3. 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.
    4. Glyn Wittwer & Marnie Griffith, 2011. "Modelling drought and recovery in the southern Murray‐Darling basin," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(3), pages 342-359, July.
    5. 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).
    6. Philippidis, George & Hubbard, Lionel, 2003. "Varietal utility and patriotic preference: the cas of European agriculture," Cahiers d'Economie et de Sociologie Rurales (CESR), INRA (French National Institute for Agricultural Research), vol. 66.
    7. George Philippidis & Lionel Hubbard, 2003. "Varietal utility and patriotic preference: the cas of European agriculture," Post-Print hal-01201033, HAL.
    8. L. J. Hubbard & G. Philippidis, 2001. "General Equilibrium and the Ban on British Beef Exports," Journal of Agricultural Economics, Wiley Blackwell, vol. 52(3), pages 87-95.
    9. George Philippidis & Hubbard Lionel, 2003. "Varietal Utility and Patriotic Preference: The Cas of European Agriculture," Cahiers d'Economie et Sociologie Rurales, INRA Department of Economics, vol. 66, pages 5-25.
    10. Thomas Hertel & David Hummels & Terrie L. Walmsley, 2014. "The vulnerability of the Asian supply chain to localized disasters," Chapters,in: Asia and Global Production Networks, chapter 3, pages 81-111 Edward Elgar Publishing.
    11. Pekka Sulamaa & Mika Widgrén, 2004. "EU-Enlargement and Beyond: A Simulation Study on EU and Russia Integration," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(4), pages 307-323, December.
    12. Philippidis, G. & Hubbard, L.J., 2001. "The economic cost of the CAP revisited," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 25(2-3), September.
    13. repec:wsi:ccexxx:v:03:y:2012:i:03:n:s2010007812500157 is not listed on IDEAS
    14. Joseph F. Francois & Olga Pindyuk & Julia Woerz, 2008. "Trade Effects of Services Trade Liberalization in the EU," FIW Research Reports series I-004, FIW.
    15. George Philippidis & Lionel Hubbard, 2003. "Modelling hierarchical consumer preferences: an application to global food markets," Applied Economics, Taylor & Francis Journals, vol. 35(15), pages 1679-1687.

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