On the microeconomic foundations of linear demand for differentiated products

This paper provides a thorough exploration of the microeconomic foundations for the multi-variate linear demand function for differentiated products, which is widely used in industrial organization. The setting is the standard representative consumer with a quasi-linear utility function. A key finding is that strict concavity of the quadratic utility function is critical for the demand system to be well defined. Otherwise, the true demand function may be quite complex: Multi-valued, non-linear and income-dependent. We uncover failures of duality relationships between substitute products and complementary products, as well as the incompatibility between high levels of complementarity and concavity. The two-good case emerges as a special case with strong but non-robust properties. A key implication is that all conclusions derived in applied economic models via the use of linear demand that does not satisfy the Law of Demand ought to be regarded with some suspicion.PostprintPeer reviewe

Home Market and Traditional Effects on Comparative Advantage in a Gravity Approach

Policy makers in "small" countries facing trade liberalisation have become concerned with the potential loss of manufacturing employment and output to "large" economies in the presence of economies of scale in production and international transport costs. This paper offers a methodology to estimate the "home market" effect for numerous industries, after accounting for transport costs and traditional comparative advantage effects. The empirical results suggest significant home-market effects in many manufacturing industries which may be capital intensive or labour intensive.Home-market effect, comparative advantage, bilateral trade, factor endowment, gravity model

A new comparative approach to macroeconomic modeling and policy analysis

In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development

Product Differentiation, Fiscal Policy, and Free Entry

Entry is recognized to be an important issue in macro models considering imperfectly competitive markets. However, two lines of research have been kept apart: the homogeneous-product oligopoly approach, where entry means more firms in the industry, and the monopolistic competition approach, where it means more brands. Our model tries to go beyond these limitations, considering a small open economy within a monetary union (characterised by a fixed exchange rate and perfect financial capital mobility). In this economy each industry produces a differentiated non-tradable good and is composed several Cournot competitors. Competition works at both the intraindustry and sector level. Decisions on both taxes and government expenditure are taken by the economy’s government, i.e., fiscal policy is decentralised within the monetary union. Since the model generates multiple equilibria, three types of entry are considered: more firms (I), more industries (II), and a combination of both (III). Fiscal policy is shown to be effective on aggregate output under the three cases. Its effect on welfare is mainly walrasian in case II, but it can be keynesian when market power is high in cases I or III.

Micro-Foundations of Urban Agglomeration Economies

This handbook chapter studies the theoretical micro-foundations of urban agglomeration economies. We distinguish three types of micro-foundations, based on sharing, matching, and learning mechanisms. For each of these three categories, we develop one or more core models in detail and discuss the literature in relation to those models. This allows us to give a precise characterisation of some of the main theoretical underpinnings of urban agglomeration economies, to discuss modelling issues that arise when working with these tools, and to compare different sources of agglomeration economies in terms of the aggregate urban outcomes they produce as well as in terms of their normative implications.

"Methodology and Microeconomics in the Early Work of Hyman P. Minsky"

This paper reviews the recently published Ph.D. thesis of Hyman P. Minsky, summarizing its main contributions to methodology and microeconomics. These were aspects of economics with which Minsky is not usually associated, but which lie at the foundation of his later work. They include critical remarks on Cambridge economics. The paper then draws out some antecedents of Minsky's ideas in the work of Henry Simons, and highlights the Marshallian monetary analysis that he adopted.

Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income

Using a gravity-type explanation of international trade flows at the industry level, it is shown that the pattern of comparative advantage in terms of sectoral export/import ratios in bilateral trade can be explained by relative income and relative per capita income. Total income of a country is a proxy of its economic size and has a positive effect on comparative advantage in most manufacturing industries (home market effect). Per capita income represents the capital-labour endowment ratio and demand conditions. In sum, it has a positive effect in (human) capital-intensive industries and a negative effect in labour-intensive industries.Gravity model, comparative advantage, bilateral trade, home market effect, factor endowment

Firms, international money and prices: a survey of the literature

Sluggish price adjustments with respect to exchange rate shocks take essentially two forms. Firstly, prices do not adjust completely to neutralize the effects of nominal exchange rate shocks. Secondly, price adjustments after exchange rate shocks only take place in discrete time intervals, in other words they are discontinuous. These two features of price adjustments form our definition of international price rigidities. In this paper we shall present a survey of the empirical and theoretical literature on international price rigidities. We provide the underlying intuition of the theoretical research and present a brief summary of the empirical findings

CURRENT ISSUES AFFECTING TRADE AND TRADE POLICY: AN ANNOTATED LITERATURE REVIEW

This review provides a base of literature describing current issues and research on the impacts of lobalization and the industrialization of agriculture and recent approaches to analyze and model agricultural trade and trade policies. Three key factors of the survey are differentiated goods, global economic integration and international supply chain linkages. The review covers 182 publications, which are presented alphabetically by author with a brief annotation describing how it relates to the above criteria. The articles are also indexed by keyword. A brief summary highlights the documented literature and includes a series of issues for future discussion and research.International Relations/Trade,

Market Power and Supply Shocks: Evidence from the Orange Juice Market

The orange juice market is a weather market because of its high geographical concentration and the natural characteristics of orange trees. A few hours of a freeze in Florida is enough to cause a supply shock to the orange juice market. How do oligopolistic firms react to supply shocks do they become more collusive or more competitive? This paper empirically examines the proposition and finds that the level of market power of orange juice firms decreases significantly, and the market becomes more competitive during supply shocks even though prices rise.Marketing,