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Monopolistic competition and income dispersion

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Author Info

  • Osharin, Alexander
  • Thisse, Jacques-François
  • Ushchev, Philip
  • Verbus, Valery

Abstract

We develop a model of monopolistic competition that accounts for consumers’ heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers’ tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 122 (2014)
Issue (Month): 2 ()
Pages: 348-352

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Handle: RePEc:eee:ecolet:v:122:y:2014:i:2:p:348-352

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Heterogeneous consumers; Income redistribution; Toughness of competition; Monopolistic competition;

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  1. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
  2. Reto Foellmi & Josef Zweimueller, . "Inequality, Market Power, and Product Diversity," IEW - Working Papers 145, Institute for Empirical Research in Economics - University of Zurich.
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  8. Hildenbrand, Werner, 1983. "On the "Law of Demand."," Econometrica, Econometric Society, vol. 51(4), pages 997-1019, July.
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  10. Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition when Income Matters," DEM Working Papers Series 055, University of Pavia, Department of Economics and Management.
  11. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  12. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721 - 765.
  13. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  14. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques‐François Thisse, 2012. "Monopolistic Competition: Beyond the Constant Elasticity of Substitution," Econometrica, Econometric Society, vol. 80(6), pages 2765-2784, November.
  15. Behrens, Kristian & Murata, Yasusada, 2007. "General equilibrium models of monopolistic competition: A new approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 776-787, September.
  16. DI COMITE, Francesco & THISSE , Jacques & ,, 2013. "Verti-zontal differentiation in export markets," CORE Discussion Papers 2013064, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  17. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
  18. Tarasov, Alexander, 2010. "Consumer Preferences in Monopolistic Competition Models," Discussion Papers in Economics 11489, University of Munich, Department of Economics.
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