Marcia M Schafgans and Joachim Stibora

Published 1 July 2014

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We develop a general equilibrium model of multiproduct fi…rms with quality differentiated goods. Households are characterized by an heterogeneous taste for the differentiated good and their income level. The use of non-homothetic preferences and vertical product differentiation (product quality) enables us to analyze how distributional changes in income affect the number of vertically differentiated …firms, their product range and prices in the presence of strategic interaction across …rms. The implications of lowering the barriers to trade within this setting are considered as well.