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Heterogeneity of consumer preferences and trade patterns in a monopolistically competitive setting

Alexander Osharin and Valery Verbus ()
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Valery Verbus: National Research University Higher School of Economics

Journal of Economics, 2018, vol. 125, issue 3, 211-237

Abstract: Abstract The paper considers a two-sector two-country trade model of monopolistic competition featuring the heterogeneity of consumer preferences and incomes within and across countries. The incorporation of heterogeneity into a monopolistic competition setting is achieved by assuming a nested Cobb–Douglas and CES utility function exhibiting both country and sector-specific consumer tastes and expenditure shares on manufacturing and traditional goods. The key question analyzed in the paper is how consumer heterogeneity affects the home bias of trade in different countries. The key finding here is that the heterogeneity in tastes and incomes of consumers can provide a substantial influence on degree of home bias in trade but only in combination with high transportation costs.

Keywords: Heterogeneous consumers; Monopolistic competition; CES utility function; International trade; Markups; Wages (search for similar items in EconPapers)
JEL-codes: F12 D43 L13 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kap:jeczfn:v:125:y:2018:i:3:d:10.1007_s00712-018-0599-z