Monopolistic competition and international trade theory

Almost twenty-five years after the appearance of Dixit and Stiglitz’s paper on
monopolistic competition and optimum product diversity, I try to take stock of the progres which has been made in applying their approach to international trade theory. I review the principal applications to trade theory and present a new one: by embedding DS preferences in a specific-factors framework, I sketch a model which shows how multinational corporations can emerge even between countries with similar factor endowments. Finally, I address some limitations of the approach, including its treatment of variety, returns to scale, entry and firms’ strategies.