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	== See also ==		== See also ==
	* [[Microeconomics]]		* Microeconomics
	* [[Market Structure]]		* Market Structure
	* [[International Trade]]		* International Trade

	== References ==		== References ==

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'''Heterogeneous goods''' are goods that differ from one another in their characteristics, so that they are not perfect substitutes. Heterogeneous goods are distinguished from homogeneous goods, which are identical and therefore perfect substitutes.

== Concept ==
The concept of heterogeneity is central to the analysis of product differentiation and of market structure. When goods are heterogeneous, consumers have preferences over the characteristics of the goods, and firms can differentiate their products to appeal to different segments of the market.

Heterogeneity can arise from differences in physical characteristics, in quality, in location, and in the services that accompany the good. The differences give firms a degree of market power, since consumers do not regard the goods of different firms as perfect substitutes.

== Product Differentiation ==
Product differentiation is the strategy of making a product distinct from those of competitors. The differentiation may be horizontal, in which the goods differ in their characteristics but are of similar quality, or vertical, in which the goods differ in quality.

Horizontal differentiation is analysed using models in which consumers have different ideal points along a spectrum of characteristics. The location model, in which firms choose positions on a line, is the classic example. Vertical differentiation is analysed using models in which all consumers prefer higher quality but differ in their willingness to pay.

The differentiation affects the intensity of competition. When goods are more differentiated, competition is less intense, since consumers are less willing to switch. The degree of differentiation therefore affects the markup that firms can charge.

== Trade in Heterogeneous Goods ==
International trade in heterogeneous goods is analysed using models of monopolistic competition, in which firms produce differentiated products and compete in a market with many firms. The models predict that trade will occur between countries with similar endowments, since consumers value variety.

The models have implications for the gains from trade. Trade in heterogeneous goods raises welfare by increasing the variety available to consumers and by allowing firms to exploit economies of scale. The gains are additional to those from comparative advantage.

The models also have implications for the effects of trade on firms. Trade exposes firms to more competition, which forces the least productive firms to exit and allows the most productive to expand. The reallocation of resources raises average productivity.

== Measurement and Data ==
The measurement of heterogeneity is difficult, since it requires information about the characteristics of goods and about the preferences of consumers. The data are often limited, and the analysis relies on proxies for differentiation.

Trade data are typically recorded at a level of aggregation that groups heterogeneous goods together. The analysis of trade in differentiated products therefore requires disaggregated data, which are available for some countries and some products.

The measurement of quality is particularly difficult, since quality is not directly observable. The hedonic method is used to estimate the value of the characteristics of goods and to construct quality-adjusted measures.

== Monopolistic Competition ==
The theory of monopolistic competition, developed by Edward Chamberlin and Joan Robinson, analyses markets in which many firms produce differentiated products. Each firm faces a downward-sloping demand curve, since consumers regard its product as distinct from those of its rivals.

In the long run, free entry drives profits to zero, since new firms enter until the demand curve of each firm is tangent to its average cost curve. The equilibrium is characterised by excess capacity, since each firm produces less than the output that would minimise its average cost.

The theory explains the coexistence of many firms with market power and with zero profits. It has been used to analyse markets including retailing, restaurants, and professional services, and it provides the basis for the analysis of trade in differentiated goods.

== Trade Models ==
The new trade theory, developed by Paul Krugman and others, applies the framework of monopolistic competition to international trade. The models show that trade can occur between countries with similar endowments, driven by the desire of consumers for variety and by the economies of scale that firms can exploit in larger markets.

The models predict that trade raises welfare by increasing the variety available to consumers and by allowing firms to produce at lower cost. The gains are additional to those from comparative advantage, and they explain the large volume of trade between similar countries.

The models also predict that trade raises the average productivity of the industry, by forcing the least productive firms to exit and by allowing the most productive to expand. The reallocation of resources raises productivity, a result that has been documented empirically.

== Measurement and Empirics ==
The empirical analysis of trade in heterogeneous goods requires disaggregated data, since the goods must be distinguished by their characteristics. The data are available for some countries and some products, and they have been used to document the patterns predicted by the models.

The research has found that trade in differentiated goods is large and growing, and that it occurs predominantly between countries at similar levels of development. The research has also found that the variety of goods traded has increased, and that the gains from variety are substantial.

The measurement of quality remains difficult, and the research relies on proxies, including the unit values of trade, which reflect both quality and cost. The interpretation of these measures requires care, since the unit value reflects the composition of the goods as well as their quality.

== Summary ==
Heterogeneous goods are the subject of the theory of monopolistic competition and of the new trade theory, which explain the coexistence of market power and of zero profits and the gains from trade in differentiated products. The analysis of these goods requires disaggregated data and careful measurement of quality.

== See also ==
* [[Microeconomics]]
* [[Market Structure]]
* [[International Trade]]

== References ==

<ref name="r1">Research on product differentiation and on monopolistic competition.</ref>
<ref name="r2">Studies of trade in differentiated goods.</ref>
<ref name="r3">Analyses of the measurement of quality and of heterogeneity.</ref>

<references />

[[Category:Microeconomics]]
[[Category:Market structure]]
[[Category:International trade]]

Heterogeneous Goods - Revision history

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