Do we go shopping downtown or in the 'burbs'? Why not both?

We study the ever more integrated and ever more unbalanced trade relationships between European countries. To better capture the complexity of economic networks, we propose two global measures that assess the trade integration and the trade imbalances of the European countries. These measures are the network (or indirect) counterparts to traditional (or direct) measures such as the trade-to-GDP (Gross Domestic Product) and trade deficit-to-GDP ratios. Our indirect tools account for the European inter-country trade structure and follow (i) a decomposition of the global trade flow into elementary flows that highlight the long-range dependencies between exporting and importing economies and (ii) the commute-time distance for trade integration, which measures the impact of a perturbation in the economy of a country on another country, possibly through intermediate partners by domino effect. Our application addresses the impact of the launch of the Euro. We find that the indirect imbalance measures better identify the countries ultimately bearing deficits and surpluses, by neutralizing the impact of trade transit countries, such as the Netherlands. Among others, we find that ultimate surpluses of Germany are quite concentrated in only three partners. We also show that for some countries, the direct and indirect measures of trade integration diverge, thereby revealing that these countries (e.g. Greece and Portugal) trade to a smaller extent with countries considered as central in the European Union network

Price competition in product variety networks

We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degrees of substitutability (edges). We also locate consumers into this network, so that the location of each consumer (node) corresponds to her “ideal” variety. We show that there exists a unique Bertrand–Nash equilibrium where prices are determined by both the firms' sign-alternating Bonacich centralities and the average willingness to pay across consumers. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the central firm does not always enjoy higher monopoly power than the peripheral firms

Social norms in networks

Although the linear-in-means model is the workhorse model in empirical work on peer effects, its theoretical properties are understudied. In this study, we develop a social-norm model that provides a microfoundation of the linear-in-means model and investigate its properties. We show that individual outcomes may increase, decrease, or vary non-monotonically with the taste for conformity. Equilibria are usually inefficient and, to restore the first best, the planner needs to subsidize (tax) agents whose neighbors make efforts above (below) the social norms. Thus, giving more subsidies to more central agents is not necessarily efficient. We also discuss the policy implications of our model in terms of education and crim

Toward a theory of monopolistic competition

We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shocks are characterized through necessary and sufficient conditions. Furthermore, we show that the attention to the CES based on its normative implications was misguided: we propose a new class of preferences, which express consumers' uncertainty about their love for variety, that yield variable markups and may sustain the optimum. Last, we show how our approach can cope with heterogeneous firms once it is recognized that the elasticity of substitution is firm-specific.SCOPUS: ar.jinfo:eu-repo/semantics/publishe

Toward a theory of monopolistic competition

We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sufficient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers

Toward a theory of monopolistic competition *

Abstract We propose a general model of monopolistic competition, which encompasses existing models while being exible enough to take into account new demand and competition features. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sucient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous rms and consumers

The network origins of entry

We develop a model of the process of entry under social learning via word-of-mouth (WOM). An incumbent’s product is known to the consumers, while the success of a potential entrant hinges on generating consumer awareness of the entrant’s product through WOM. We model WOM as a percolation process on a random graph. We show that whether an entrant can gain a non-negligible level of awareness depends on the social network structure via two sufficient statistics, which are functions of the first three factorial moments of the degree distribution. We categorize the different pricing equilibria into the classical blockaded, deterred, and accommodated entry taxonomy. Under deterred entry, our model produces a model of limit pricing by an incumbent to prevent an entrant gaining a non-negligible level of awareness. By focusing on multinomial logit demand and on a mixed-Poisson degree distribution, we show that increasing the network density shifts the pricing equilibrium from blockaded to deterred and, finally, to accommodated entry. Using numerical simulations, we also show that the aggregate consumer surplus may be non-monotonic with respect to network density. Finally, if the incumbent has knowledge about the consumer’s number of friends and can charge personalized prices, we find that it is optimal for the incumbent to charge lower prices to more-connected consumers

Do we go shopping downtown or in the 'burbs ?

We combine spatial and monopolistic competition to study market interactions between downtown retailers and an outlying shopping mall. Consumers shop at either one marketplace or at both, and buy each variety in volume. The market solution stems from the interplay between the market expansion effect generated by consumers seeking more opportunities, and the competition effect. Firms’ profits increase (decrease) with the entry of local competitors when the former (latter) dominates. Downtown retailers vanish swiftly when the mall is large. A predatory but efficient mall need not be regulated, whereas the regulator must restrict the size of a mall accommodating downtown retailers

Monopolistic competition and income dispersion

We develop a model of monopolistic competition that accounts for consumers' heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers' tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same

Toward a general theory of peer effects

There is substantial empirical evidence showing that peer effects matter in many activities. The workhorse model in empirical work on peer effects is the linear-in means (LIM) model, whereby it is assumed that agents are linearly affected by the mean action of their peers. We develop a new general model of peer effects that relaxes the linear assumption of the best-reply functions and the mean peer behavior and that encompasses the spillover, conformist model, and LIM model as special cases. Then, using data on adolescent activities in the U.S., we structurally estimate this model. We find that for many activities, individuals do not behave according to the LIM model. We run some counterfactual policies and show that imposing the mean action as an individual social norm is misleading and leads to incorrect policy implications