Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/215084 
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8082
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Our novel approach to modeling monopolistic competition with heterogeneous consumers involves a space of characteristics of a differentiated good (consumers' ideal points), alike Hotelling (1929). Firms have heterogeneous costs à la Melitz (2003). In addition to price setting, each firm also chooses its optimal location/niche in this space. We formulate conditions for positive sorting: more efficient firms serve larger market segments and face tougher competition in the equilibrium. Our framework entails rich equilibrium patterns displaying non-monotonic markups, high in the most and least populated niches, and the unequal gains from trade across different consumers.
Subjects: 
firm heterogeneity
product space
positive sorting
product niches
JEL: 
F10
L11
L13
Document Type: 
Working Paper
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