On the Dixit-Stiglitz model of monopolistic competition (original) (raw)
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SSRN Electronic Journal, 2000
We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms' size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms' size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry.
Notes and Comments Monopolistic Competition: Beyond the Constant Elasticity of Substitution
2016
We propose a model of monopolistic competition with additive preferences and variable marginal costs. Using the concept of “relative love for variety, ” we provide a full characterization of the free-entry equilibrium. When the relative love for variety increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The constant elastic-ity of substitution is the only case in which all competitive effects are washed out. We also show that our results hold true when the economy involves several sectors, firms are heterogeneous, and preferences are given by the quadratic utility and the translog.
Toward a theory of monopolistic competition
Journal of Economic Theory, 2017
We propose a general model of monopolistic competition which encompasses existing models while being exible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shock are characterized through necessary and sucient conditions. Furthermore, we show that the attention to the constant elasticity of substitution (CES) based on its normative implications was misguided: constant markups , additivity and homotheticity are neither necessary nor sucient for the market to deliver the optimum outcome. Our approach can cope with heterogeneous rms once it is recognized that the elasticity of substitution is rm-specic. Finally, we show how our setup can be extended to cope with multiple sectors.
A Model of Monopolistic Competition with Personal Income Dispersion
Metroeconomica, 2005
We introduce non-homothetic preferences in the Dixit-Stiglitz model of monopolistic competition, and enquire about the e¤ects of a change in income dispersion on the …rms' optimal decisions and market equilibrium. Income dispersion, modelled as a mean preserving spread, is shown to a¤ect only the degree of product di¤erentiation under the standard hypothesis on the …rms' decision making process, while it generates a positive co-movement of demand and demand elasticity, when the negligibility assumption is removed and the price index e¤ect is taken into account. JEL Classi…cation no: D31, L11, L16.
Monopolistic competition in general equilibrium: beyond the CES
2011
We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.
Substitutability and Competition in the Dixit-Stiglitz Model
SSRN Electronic Journal, 2004
Substitutability and Competition in the Dixit-Stiglitz Model * The effects of competition on growth are analyzed in the recent literature by comparing economies with the same market structure but different degrees of substitutability. In this note, we show that in a general equilibrium model with monopolistic competition à la Dixit-Stiglitz the effect of substitutability on the allocation of resources is independent of the associated change in competition. Higher substitutability increases welfare, output and productivity because resources shift towards the most productive sectors. However, since markups are equal across sectors, changes in market power do not affect the relative price of consumption goods, implying that the induced changes in market power do not have any direct effect on equilibrium allocations.
Monopoly and General Equilibrium: An Extension
The paper shows the existence of a monopolistic equilibrium in a general equilibrium model under conditions which are weaker than the usual ones adopted by the literature. More specifically, no convexity assumption of preferences of households and of production sets of firms is adopted; moreover , the assumption of possibility of inaction for the monopolist is also dropped .