Working Paper: CEPR ID: DP8752
Authors: Francesco di Comite; Jacques-François Thisse; Hylke Vandenbussche
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: heterogeneous firms; horizontal differentiation; monopolistic competition; nonsymmetric varieties; vertical differentiation
JEL Codes: D43; F12; F14; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Vertical differentiation (L22) | Prices (D49) |
| Horizontal differentiation (L22) | Quantities sold (C69) |
| Consumer taste heterogeneity (D11) | Quantities sold (C69) |
| Vertical differentiation (L22) | Correlation of prices across markets (G19) |
| Consumer taste heterogeneity (D11) | Correlation of quantities across markets (C10) |
| Prices (D49) | Quantities sold (C69) |