Markups in a two‑country monopolistic competition model of trade with heterogeneous consumers
The paper develops a two-country monopolistic competition model of trade featuring country-specifc consumer tastes. The accounting for heterogeneity in tastes is achieved by assuming diferent elasticities of substitution in the CES utility function for diferent country consumers. The proposed framework extends the canonical Krugman’s approach by revealing new efects regarding markups response to consumer heterogeneity and trade liberalization. Specifcally, 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 frms across destination countries.