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Monopolistic competition and income dispersion

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  • 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

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

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  11. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  12. Hildenbrand, Werner, 1983. "On the "Law of Demand."," Econometrica, Econometric Society, vol. 51(4), pages 997-1019, July.
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  15. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Corrado Benassi & Alessandra Chirco & Caterina Colombo, 2005. "A Model Of Monopolistic Competition With Personal Income Dispersion," Metroeconomica, Wiley Blackwell, vol. 56(3), pages 305-317, 07.
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