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Verti-zontal differentiation in monopolistic competition

Author

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  • Francesco Di Comite

    () (Department of Economics (IRES), Université Catholique de Louvain
    European Commission, Directorate-General Economic and Financial Affairs)

  • Jacques-François Thisse

    () (CORE, Université Catholique de Louvain)

  • Hylke Vandenbussche

    () (National Bank of Belgium, Research Department
    CORE, Université Catholique de Louvain
    Department of Economics (IRES), Université Catholique de Louvain)

Abstract

The recent availability of trade data at a firm-product-country level calls for a new generation of models able to exploit the large variability detected across observations. By developing a model of monopolistic competition in which varieties enter preferences non-symmetrically, we show how consumer taste heterogeneity interacts with quality and cost heterogeneity to generate a new set of predictions. Applying our model to a unique micro-level dataset on Belgian exporters with product and destination market information, we find that heterogeneity in consumer tastes is the missing ingredient of existing monopolistic competition models necessary to account for observed data patterns.

Suggested Citation

  • Francesco Di Comite & Jacques-François Thisse & Hylke Vandenbussche, 2011. "Verti-zontal differentiation in monopolistic competition," Working Paper Research 216, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201110-216
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Picard, Pierre M. & Okubo, Toshihiro, 2012. "Firms' locations under demand heterogeneity," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 961-974.
    2. Jože Damijan & Jozef Konings & Sašo Polanec, 2013. "Pass-on trade: why do firms simultaneously engage in two-way trade in the same varieties?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(1), pages 85-111, March.
    3. Hylke Vandenbussche & Francesco Di Comite & Laura Rovegno & Christian Viegelahn, 2011. "Moving up the Quality ladder? EU-China Trade Dynamics in Clothing," LICOS Discussion Papers 30111, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    4. 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.
    5. Schweinberger, A.G. & Woodland, A.D., 2015. "Entrepreneurship and conflict generating product price changes," European Economic Review, Elsevier, vol. 78(C), pages 158-174.
    6. Lionel Fontagné & Angelo Secchi & Chiara Tomasi, 2016. "The Fickle Fringe and the Stable Core: Exporters' Product Mix Across Markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01315601, HAL.
    7. Silva, Mario, 2017. "New monetarism with endogenous product variety and monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 158-181.
    8. Lionel Fontagné & Angelo Secchi & Chiara Tomasi, 2014. "Fickle product mix: exporters adapting their product vectors across markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01299822, HAL.
    9. Vincent Boitier & Antoine Vatan, 2017. "Hierarchy of Trade and Sequential Exporting," Working Papers 2017-22, CEPII research center.
    10. Konstantins Benkovskis & Julia Wörz, 2014. "How does taste and quality impact on import prices?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(4), pages 665-691, November.
    11. Francesco Di Comite, 2012. "Measuring quality and non-cost competitiveness at a country-product level," European Economy - Economic Papers 2008 - 2015 467, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    Keywords

    Heterogeneous firms; Product Differentiation; Monopolistic Competition; Nonsymmetric varieties;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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