Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 08-7: Monopolistic Competition, International Trade and Firm Heterogeneity - a Life Cycle Perspective

Jørgen Drud Hansen (), Virmantas Kvedaras and Jørgen Ulff-Møller Nielsen ()
Additional contact information
Jørgen Drud Hansen: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Virmantas Kvedaras: Department of Econometric Analysis, Postal: University of Vilnius,
Jørgen Ulff-Møller Nielsen: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: This paper presents a dynamic international trade model based on monopolistic competition, where observed intra-industry differences at a given point in time reflect different stages of the firm’s life cycle. New product varieties of still higher quality enter the market every period rendering old varieties obsolescent in a process of creative destruction. For given technology (variety) production costs decrease after an infant period due to learning. It is shown that several patterns of exports may arise depending primarily on the size of fixed trade costs. At a given point in time firms therefore differ due to different age, although all firms are symmetric in a life cycle perspective. The paper thus offers an alternative view on firm heterogeneity compared with other recent papers, where productivity differences appear as an outcome of a stochastic process.

Keywords: Product innovations; learning; creative destruction; firm heterogeneity; export performance

JEL-codes: F12; F13

39 pages, May 1, 2008

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08-7_jdhajum.pdf PDF-file

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