Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271907 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10263
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Our novel approach to modeling monopolistic competition with heterogeneous firms and consumers involves spatial product differentiation. Space can be interpreted either as a geographical space or as a space of characteristics of a differentiated good. In addition to price setting, each firm also chooses its optimal location in this space. We formulate conditions for positive sorting: more productive firms serve larger market segments and face tougher competition; and for the existence and uniqueness of the equilibrium. To quantify the role of the sorting mechanism, we calibrate the model using cross-sectional haircut market data and perform counterfactual analysis. We find that inequality in the distribution of the gains among consumers caused by positive market shocks can be substantial: the gains of consumers from more populated locations are 3-4 times higher.
Subjects: 
firm heterogeneity
geographical space
product space
positive sorting
product niches
JEL: 
F10
L11
L13
Document Type: 
Working Paper
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