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.
Highlights
The influence of consumer preferences on international trade patterns is among widely discussed topics in the modern economic literature (Fieler 2011; Caron et al 2014; Di Comite et al 2014; Simonovska 2015; Hottman et al 2016)
In accordance with (19), the level of markups in each of the two countries depends on three endogenous (p, w, N ) and four exogenous parameters of the model
4 Conclusion This paper develops a two-country trade model of monopolistic competition featuring consumers’ heterogeneity across destinations, which is accounted by assuming different elasticities of substitution in the constant elasticity of substitution (CES) utility function for different country consumers
Summary
The influence of consumer preferences on international trade patterns is among widely discussed topics in the modern economic literature (Fieler 2011; Caron et al 2014; Di Comite et al 2014; Simonovska 2015; Hottman et al 2016). The interest to this issue is boosted by a large number of empirical facts that cannot be satisfactorily explained in the framework of existing models (Obstfeld and Rogoff 2000; Markusen 2013; Caron et al 2011, 2014; Cassing and Nishioka 2015). This assumption, which is in the center of canonical models of trade (Krugman 1980; Helpman and Krugman 1985), implies that the market demand function is the same for the same varieties across different countries as well as for different varieties within the country.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
