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Discussion Paper Details

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Title: Verti-zontal Differentiation in Monopolistic Competition

Author(s): Francesco Di Comite, Jacques-François Thisse and Hylke Vandenbussche

Publication Date: January 2012

Keyword(s): heterogenous firms, horizontal differentiation, monopolistic competition, non-symmetric varieties and vertical differentiation

Programme Area(s): International Trade and Regional Economics

Abstract: 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 that rationalizes the empirical finding that firm-product quantities show systematically more variability than prices across export destinations. Accounting for unexplained data variation, our model can thus be used to improve demand identification.

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Bibliographic Reference

Di Comite, F, Thisse, J and Vandenbussche, H. 2012. 'Verti-zontal Differentiation in Monopolistic Competition'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8752