Monopolistic competition with generalized additively separable preferences

We study monopolistic competition equilibria with free entry and social planner solutions under symmetric generalized additively separable preferences, which encompass known cases such as additive, homothetic, translog and other preferences. This setting can jointly produce competition and selection effects of entry, incomplete pass-through of cost changes and pricing to market. We discuss the inefficiencies of the market equilibrium under Gorman-Pollak preferences and show its optimality under implicit constant elasticity of substitution preferences. We propose a new specification of generalized translated power preferences, and discuss applications to trade and macroeconomics.

Pricing behaviour of the New World wine exporters

Purpose In recent decades, New World winemakers have increased their wine export to European markets and became considerable market players in the EU. Therefore, this paper aims to explore whether the major New World wine producers are able to exploit its market power at European destination markets. Design/methodology/approach The paper applies the pricing-to-market (PTM) model of trade in respect of asymmetric effect of exchange rate changes by using monthly bilateral wine data between January 2000 and December 2016. Findings First, there is evidence of PTM in three New World wine exporters, namely, Chile, South Africa and the USA. Chile was able to apply price discrimination across Danish, German, Dutch and the British wine markets. Second, South Africa set their prices in Belgian, Dutch and Swedish markets, while the USA discriminated their wine prices in Denmark and Sweden. In contrast, this advantage was not observable in the case of Argentina and Australia. Third, the local-currency price stability was explored in Chilean wine import prices (exported to Belgium, the Czech Republic), South African wine prices (exported to France, Denmark, Germany), in US wine prices (sold in Germany and the UK). Furthermore, the analysis of the asymmetric effects of exchange rate changes suggests that depreciation of the exporter’s currency relative to the Euro had not a significant impact on EU wine import prices. On the whole, the estimated pricing to market model indicates that a non-competitive pricing behaviour of New World exporters was limited and was rather due to the market-specific characteristics. Research limitations/implications The research provides multiple advice for New World wine producers. First, in general, European consumers do not pay an extra price for the New World bottled wines. Second, only Chilean, South African and North American wine exporters can expect higher prices for its wines from European buyers only. Moreover, European wine markets are fairly competitive where New World wine exporters do not have significant market dominance. Therefore, New World wine exporters should strengthen its wine marketing and branding strategy to gain higher market share in Europe and to attract attention to its wines. Finally, exchange rates relative to Euro should be continuously monitored by the New World wine exporters because it might deviate the wine export prices significantly. Originality/value The study applies the pricing-to-market model to major New World wine exporters on the European Union’s destination market. The paper also makes valuable contributions to the wine literature by testing the asymmetric effects of exchange rate changes on wine import prices. It analyses the nature of price discrimination, whether it is market-specific or exchange rate influenced, or both.

International Trade with Indirect Additivity

We develop a general equilibrium model of trade that features “indirectly additive” preferences and heterogeneous firms. Monopolistic competition generates markups that are increasing in firm productivity and in destination country per capita income, but independent from destination population, as documented empirically. The gains from trade liberalization are lower than in models based on CES preferences, and the difference is governed by the average pass-through. When we calibrate the model so as to match observed pricing-to-market in micro-data, it generates welfare gains that are substantially lower than those predicted by commonly employed frameworks. (JEL D11, D43, F12, L11)