Heterogeneous consumers 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

HSE Working papers from National Research University Higher School of Economics

Abstract: The paper considers a two-country trade model of monopolistic competition featuring the heterogeneity of consumer preferences both within and across countries. The incorporation of heterogeneity into a traditional monopolistic competition setting is achieved by assuming different elasticities of substitution in the CES utility function for different consumers. The proposed setup expands on the traditional model of trade by demonstrating a richer set of country specific effects. The key question analysed in the paper is how consumer heterogeneity and trade liberalization affect markups and wages in different countries. Unlike the canonical CES-model of trade, where markups in different countries are constant and identical to each other, our model, by taking consumer heterogeneity into account, provides different markups across countries, incorporating both heterogeneity and trade specifics. The model also predicts that the larger of two countries engaged in costly trade may have a wage rate higher than, lower than or equal to that of the smaller one, depending on the general equilibrium conditions. This finding is in contrast to that of the canonical setting, where the larger country under costly trade always has a higher wage rate.

Keywords: heterogeneous consumers; monopolistic competition; CES utility function; international trade, markups, wages (search for similar items in EconPapers)
JEL-codes: D43 F12 L13 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2016
New Economics Papers: this item is included in nep-int and nep-upt
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Published in WP BRP Series: Economics / EC, March 2016, pages 1-37

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Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:131/ec/2016

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