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Verti-zontal Differentiation in Monopolistic Competition

Francesco Di Comite, Jacques Thisse () and Hylke Vandenbussche ()

No 8752, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: heterogenous firms; horizontal differentiation; monopolistic competition; non-symmetric varieties; vertical differentiation (search for similar items in EconPapers)
JEL-codes: D43 F12 F14 L16 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-bec, nep-com and nep-int
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Working Paper: Verti-zontal Differentiation in Monopolistic Competition (2011) Downloads
Working Paper: Verti-zontal Differentiation in Monopolistic Competition (2011) Downloads
Working Paper: Vert-zonal Differentiation in Monopolistic Competition (2011) Downloads
Working Paper: Verti-zontal differentiation in monopolistic competition (2011) Downloads
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