Dixit–Stiglitz model (original) (raw)

Dixit–Stiglitz model is a model of monopolistic competition developed by Avinash Dixit and Joseph Stiglitz (1977). It has been used in many fields of economics including macroeconomics, economic geography and international trade theory. The model formalises consumers' preferences for product variety by using a CES function. Previous attempts to provide a model that accounted for variety preference (such as Harold Hotelling's location model) were indirect and failed to provide an easily interpretable and usable form for further study. In the Dixit-Stiglitz model, variety preference is inherent within the assumption of monotonic preferences because a consumer with such preferences prefers to have an average of any two bundles of goods as opposed to extremes.