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Vert-zonal Differentiation in Monopolistic Competition

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

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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File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp300.pdf
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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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