We thank participants at the EIIT 2004 and NBER conferences, and seminar participants at the Universities of Purdue, Vanderbilt, Texas, Indiana, and Illinois for helpful comments. Hummels thanks Purdue CIBER and NSF, and Lugovskyy thanks Wang CIBER at the University of Memphis for financial support.
International Pricing in a Generalized Model of Ideal Variety
Version of Record online: 22 JAN 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue Supplement s1, pages 3–33, February 2009
How to Cite
HUMMELS, D. and LUGOVSKYY, V. (2009), International Pricing in a Generalized Model of Ideal Variety. Journal of Money, Credit and Banking, 41: 3–33. doi: 10.1111/j.1538-4616.2008.00197.x
- Issue online: 22 JAN 2009
- Version of Record online: 22 JAN 2009
- Received October 30, 2007; and accepted in revised form July 18, 2008.
- Lancaster ideal variety;
- price to market
We examine international markups and pricing in a generalized version of an “ideal variety” model. In this model, entry causes crowding in variety space, so that the marginal utility of new varieties falls as market size grows. Crowding is partially offset by income effects, as richer consumers will pay more for varieties closer matched to their ideal types. We show theoretically and confirm empirically that declining marginal utility of new varieties results in: a higher own-price elasticity of demand (and lower prices) in large countries and a lower own-price elasticity of demand (and higher prices) in rich countries. The model is also useful for generating facts from the literature regarding cross-country differences in the rate of variety expansion.