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Taste for Variety and Endogenous Fluctuations in a Monopolistic Competition Model

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  • Thomas Seegmuller

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost), and monopoly profits affect the occurrence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety due to endogenous product diversity. Introducing monopolistic competition (Dixit and Stiglitz (1977), Bénassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity, which has a direct influence on the real wage and the real interest rate.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00266722.

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Date of creation: Sep 2008
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Publication status: Published, Macroeconomic Dynamics, 2008, 12, 4, 561-577
Handle: RePEc:hal:cesptp:halshs-00266722

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00266722
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Keywords: Endogenous fluctuations; taste for variety; imperfect competition;

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  1. Rodolphe Dos Santos Ferreira & Teresa Lloyd-Braga, 2002. "Can market power sustain endogenous growth in overlapping-generations economies?," Economic Theory, Springer, Springer, vol. 20(1), pages 199-205.
  2. Jean-Michel Grandmont, 2008. "Nonlinear Difference Equations, Bifurcations and Chaos: An Introduction," Working Papers 2008_23, Department of Economics, University of Venice "Ca' Foscari".
  3. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2007. "Indeterminacy in dynamic models: When Diamond meets Ramsey," Journal of Economic Theory, Elsevier, Elsevier, vol. 134(1), pages 513-536, May.
  4. Gali, J., 1991. "Monopolistic Competition, Business Cycles and the Composition of Aggregate Demand," Papers, Columbia - Graduate School of Business 92-03, Columbia - Graduate School of Business.
  5. Thomas Seegmuller, 2009. "Capital-Labour Substitution And Endogenous Fluctuations: A Monopolistic Competition Approach With Variable Markup," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 60(3), pages 301-319.
  6. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Thomas Seegmuller, 2005. "On the stabilizing virtues of imperfect competition," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 1(4), pages 313-323.
  8. Weder, Mark, 1997. "Animal spirits, technology shocks and the business cycle," SFB 373 Discussion Papers, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 1997,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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  11. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 87-120, March.
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  14. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, Elsevier, vol. 52(1), pages 41-47, July.
  15. G, Cazzavillan & T, Lloyd-Braga & P, A, Pintus, 1997. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Working Papers, Centre de Recherche en Economie et Statistique 97-29, Centre de Recherche en Economie et Statistique.
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  26. Rivard Brian A., 1994. "Monopolistic Competition, Increasing Returns, and Self-Fulfilling Prophecies," Journal of Economic Theory, Elsevier, Elsevier, vol. 62(2), pages 346-362, April.
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Cited by:
  1. Thomas Seegmuller & Leonor Modesto & Teresa Lloyd-Braga, 2008. "Market Imperfections and Endogenous Fluctuations," 2008 Meeting Papers 739, Society for Economic Dynamics.
  2. Pavlov, Oscar & Weder, Mark, 2012. "Variety matters," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(4), pages 629-641.

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