Costas Arkolakis: Big icebergs melt slower


In a short two-page note, Yale’s Costas Arkolakis shows that you can introduce non-standard transport costs into the Dixit-Stiglitz monopolistic competition set-up and get clean results. You might call the transport costs “variable icebergs”:

t(q) = Τqa

where a < 0 so that the unit cost of shipping the good is decreasing with the size of the shipment.

Arkolakis shows that consumers’ demands and firms’ mark-ups come out cleanly in the usual CES fashion, so that this formulation is tractable and isomorphic with the usual iceberg approach in some respects. In the Melitz (2003) formulation, you preserve Pareto distributed outcomes, they just have a different coefficient.