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Verti-zontal differentiation in monopolistic competition

  • 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)

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.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 216.

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Length: 59 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:nbb:reswpp:201110-216
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