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Monopolistic Competition: Beyond the CES

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  • Kokovin, Sergey
  • Thisse, Jacques-François
  • Zhelobodko, Evgeny

Abstract

We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium based on an Arrow-Pratt measure of concavity of the utility, interpreted as the relative love for variety. When the relative love for variety increases with the consumption level, the market displays standard competitive effects. On the contrary, when it decreases, the equilibrium price increases with the number of firms and the market size, while the CES is the borderline case. Finally, we apply our setting to trade theory and uncover several new properties hindered by the CES, such as dumping and reverse dumping.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7947.

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Date of creation: Aug 2010
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Handle: RePEc:cpr:ceprdp:7947

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Related research

Keywords: entry; monopolistic competition; relative love for variety; trade;

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References

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  1. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  2. Harald Badinger, 2007. "Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Mark-up Ratios in EU Industries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(4), pages 497-519, 08.
  3. Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-FranÁois Thisse, 2002. "Agglomeration and Trade Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 409-436, May.
  4. Christian Broda & David E. Weinstein, 2004. "Globalization and the Gains from Variety," NBER Working Papers 10314, National Bureau of Economic Research, Inc.
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  7. Michael H. Riordan & Yongmin Chen, 2005. "Price and Variety in the Spokes Model," Discussion Papers 0405-20, Columbia University, Department of Economics.
  8. 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.
  9. Julien Martin, 2009. "Spatial Price Discrimination in International Markets," Working Papers 2009-21, CEPII research center.
  10. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," NBER Working Papers 13054, National Bureau of Economic Research, Inc.
  11. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  12. Kalina Manova & Zhiwei Zhang, 2009. "Export Prices Across Firms and Destinations," NBER Working Papers 15342, National Bureau of Economic Research, Inc.
  13. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
  14. 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.
  15. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
  16. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
  17. Brakman, Steven & Heijdra, Ben J., 2002. "The monopolistic competition revolution in retrospect," CCSO Working Papers 200215, University of Groningen, CCSO Centre for Economic Research.
  18. Michael B. Ward & Jay P. Shimshack & Jeffrey M. Perloff & J. Michael Harris, 2002. "Effects of the Private-Label Invasion in Food Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 961-973.
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