DP8752 Verti-zontal Differentiation in Monopolistic Competition
|Author(s):||Francesco Di Comite, Jacques-François Thisse, Hylke Vandenbussche|
|Publication Date:||January 2012|
|Keyword(s):||heterogenous firms, horizontal differentiation, monopolistic competition, non-symmetric varieties, vertical differentiation|
|JEL(s):||D43, F12, F14, L16|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8752|
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.