Discussion paper

DP8752 Verti-zontal Differentiation in Monopolistic Competition

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.


Thisse, J, H Vandenbussche and F Di Comite (2012), ‘DP8752 Verti-zontal Differentiation in Monopolistic Competition‘, CEPR Discussion Paper No. 8752. CEPR Press, Paris & London. https://cepr.org/publications/dp8752