Markups in a two-country monopolistic competition model of trade with heterogeneous consumers

Alexander Osharin, Valery Verbus (), Irina Bakunina (), Vera Silaeva () and Marina Silaeva ()
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Valery Verbus: National Research University Higher School of Economics
Irina Bakunina: National Research University Higher School of Economics
Vera Silaeva: National Research University Higher School of Economics
Marina Silaeva: National Research University Higher School of Economics

Journal of Economic Structures, 2020, vol. 9, issue 1, 1-12

Abstract: Abstract The paper develops a two-country monopolistic competition model of trade featuring country-specific consumer tastes. The accounting for heterogeneity in tastes is achieved by assuming different elasticities of substitution in the CES utility function for different country consumers. The proposed framework extends the canonical Krugman’s approach by revealing new effects regarding markups response to consumer heterogeneity and trade liberalization. Specifically, the model predicts that, depending on the preference structure, trade liberalization may lead either to decrease or increase in the level of markups, charged by monopolistically competitive firms across destination countries.

Keywords: Heterogeneous consumers; Monopolistic competition; CES utility function; International trade; Markups (search for similar items in EconPapers)
JEL-codes: D43 F12 L13 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1186/s40008-020-0179-6

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