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Monopolistic competition and income dispersion

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  • OSHARIN, Alexander

    ()
    (NRU-Higher School of Economics, Russia)

  • THISSE, Jacques-François

    ()
    (Université catholique de Louvain, CORE, Belgium)

  • USHCHEV, Philip

    ()
    (NRU-Higher School of Economics, Russia)

  • VERBUS, Valery

    ()
    (NRU-Higher School of Economics, Russia)

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

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013071.

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Date of creation: 31 Dec 2013
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Handle: RePEc:cor:louvco:2013071

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Keywords: heterogenous consumers; income redistribution; toughness of competition; monopolistic competition;

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  1. Yurko, Anna, 2006. "How Does Income Inequality Affect Market Outcomes in Vertically Differentiated Markets?," MPRA Paper 4028, University Library of Munich, Germany, revised Jul 2007.
  2. Hildenbrand, Werner, 1983. "On the "Law of Demand."," Econometrica, Econometric Society, vol. 51(4), pages 997-1019, July.
  3. Stephen J Redding & Peter K Schott & Andrew B Bernard, 2007. "Multi-product Firms and Trade Liberalization," 2007 Meeting Papers 44, Society for Economic Dynamics.
  4. Tarasov, Alexander, 2009. "Consumer Preferences in Monopolistic Competition Models," MPRA Paper 19990, University Library of Munich, Germany.
  5. ZHELOBODKO, Evgeny & KOKOVIN, Sergey & Parenti, Mathieu & THISSE, Jacques-François, . "Monopolistic competition beyond the constant elasticity of substitution," CORE Discussion Papers RP -2488, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Markusen, James R., 2010. "Putting Per-Capita Income back into Trade Theory," CEPR Discussion Papers 7790, C.E.P.R. Discussion Papers.
  7. Pablo D. Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2009. "Income Distribution, Product Quality, and International Trade," NBER Working Papers 15329, National Bureau of Economic Research, Inc.
  8. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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  10. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  11. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
  12. Grandmont, Jean-Michel, 1987. "Distributions of Preferences and the 'Law of Demand.'," Econometrica, Econometric Society, vol. 55(1), pages 155-61, January.
  13. Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition when Income Matters," DEM Working Papers Series 055, University of Pavia, Department of Economics and Management.
  14. Reto Foellmi & Josef Zweimueller, . "Inequality, Market Power, and Product Diversity," IEW - Working Papers 145, Institute for Empirical Research in Economics - University of Zurich.
  15. 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).
  16. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
  17. 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.
  18. 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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