Konrad Adler and Simon Fuchs
Working Paper 2022-14
Linder (1961) conjectured that taste differences could impede trade flows. We extend Krugman (1980) to allow for producers that face taste heterogeneity with volatile demand. Consumers are characterized by different taste over product attributes and idiosyncratic risk. Firms face a portfolio type of problem where they trade off supplying the largest consumer groups against higher exposure to group-specific risk. We develop an empirical strategy to estimate consumer taste from observed market shares across multiple distinct markets of the same product, as well as the key parameters that pin down the firm’s portfolio choice problem. We apply our framework to estimate the impact of the rise of China on the global movies market and characterize the heterogeneous welfare effects across countries.
JEL classification: F11, F14
Key words: taste heterogeneity, volatility, gains from trade
For their comments, the authors are grateful to Treb Allen, Thomas Chaney, Christian Hellwig, and Thierry Mayer. This project has received funding from the European Research Council (ERC) under the European Union’s Horizon2020 research and innovation program, GA number 788547 (APMPAL-HET). Konrad Adler acknowledges funding by the ERC ADG 2016–GA 740272 lending. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content Simon Fuchs, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.
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