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Monopolistic Competition in General Equilibrium: Beyond the CES

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Author Info

  • Evgeny Zhelobodko

    (Novosibirsk State University, Russia)

  • Sergey Kokovin

    (Novosibirsk State University (Russia) and Sobolev Institute of Mathematics (Russia))

  • Mathieu Parenti

    (Université de Paris 1 and PSE, France)

  • Jacques-François Thisse

    (CORE, Université catholique de Louvain (Belgium), Université du Luxembourg (Luxembourg), CEPR (UK), and RIEB, Kobe University (Japan))

Abstract

We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2011-16.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2011-16.

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Length: 41 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:kob:dpaper:dp2011-16

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Keywords: Monopolistic competition; Additive preferences; Love for variety; Heterogeneous firms;

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References

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  1. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(2), pages 541-585, May.
  2. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  3. Michael H. Riordan & Yongmin Chen, 2005. "Price and Variety in the Spokes Model," Discussion Papers, Columbia University, Department of Economics 0405-20, Columbia University, Department of Economics.
  4. Thomas J. Holmes & John J. Stevens, 2004. "Geographic concentration and establishment size: analysis in an alternative economic geography model," Journal of Economic Geography, Oxford University Press, vol. 4(3), pages 227-250, June.
  5. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. 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.
  7. 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.
  8. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
  9. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series, Federal Reserve Bank of Chicago WP-03-12, Federal Reserve Bank of Chicago.
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  11. Thomas J. Holmes & John J. Stevens, 2010. "Exports, Borders, Distance, and Plant Size," Working Papers 10-13, Center for Economic Studies, U.S. Census Bureau.
  12. Kokovin, Sergey & Thisse, Jacques-François & Zhelobodko, Evgeny, 2010. "Monopolistic Competition: Beyond the CES," CEPR Discussion Papers 7947, C.E.P.R. Discussion Papers.
  13. Ward, Michael B. & Shimshack, Jay P. & Perloff, Jeffrey M. & Harris, J. Michael, 2002. "Effects of the private-label invasion in food industries," MPRA Paper 22186, University Library of Munich, Germany.
  14. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  15. Julien Martin, 2010. "Markups, Quality and Transport Costs," Working Papers 2010-17, Centre de Recherche en Economie et Statistique.
  16. 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.
  17. 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.
  18. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
  19. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
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  21. 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.
  22. Harald Badinger, 2007. "Has the EU’s Single Market Programme Fostered Competition? Testing for a Decrese in Markup Rations in EU Industries," Working Papers 135, Oesterreichische Nationalbank (Austrian Central Bank).
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Citations

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Cited by:
  1. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
  2. Zhelobodko, E. & Sidorov, A. & Thisse, J.-F., 2013. "Monopolistic Competition vs Oligopoly in the "Large Economy": How Much Is Difference?," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 19(3), pages 10-26.
  3. Yoshitsugu Kanemoto, 2012. "Cost-Benefit Analysis in Monopolistic Competition Models of Urban Agglomeration," GRIPS Discussion Papers 12-04, National Graduate Institute for Policy Studies.
  4. Lu, Yi & Tao, Zhigang & Yu, Linhui, 2011. "Agglomeration and Markup," MPRA Paper 38974, University Library of Munich, Germany, revised May 2012.

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