The Heckscher-Ohlin model with monopolistic competition and general preferences

- The note generalizes the Helpman-Krugman model of trade to any preferences over the differentiated goods.
- The Heckscher-Ohlin model with general preferences delivers pricing to market in the differentiated goods.
- Non-homotheticity generates higher prices in the capital abundant country.
- The 2×2×2 model delivers inefficient business creation and pricing when preferences are not CES.

I extend the neoclassical 2×2×2 trade model to general preferences over a variety of goods supplied under monopolistic competition in a sector while the other sector is perfectly competitive. Non-homothetic preferences deliver pricing to market, incomplete pass-through and market size effects. Under realistic conditions, the differentiated goods are sold at a higher price in the capital-abundant country.