Behavioral characteristics of applied general equilibrium models with variable elasticity of substitution between varieties from different sources

This study explores the behavioral characteristics of the Melitz-type heterogeneous and the Krugman-type homogeneous firm models that endogenize substitution elasticity as an increasing function of the total number of varieties that are available in each destination country/region. Using a case the United States (US) liberalizes imports of manufactured products from China as an example, simulation experiments with a three-region, three-sector applied general equilibrium model of global trade revealed that economic agents comply with more inefficient circumstances when the importer's preference for variety intensifies. Whereas, a more efficient environment enables countries, including those excluded from a free trade agreement, to receive welfare gains when the influence of the total number of varieties to the substitution elasticity becomes strong.