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Monopolistic Competition: CES Redux?

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  • Paolo Bertoletti

    ()
    (Department of Economics and Management, University of Pavia)

  • Paolo Epifani

    ()
    (Department of Economics, IGIER and Baffi Centre, Università Bocconi)

Abstract

We investigate competitive, selection and reallocation effects in monopolistic competition trade models. We argue that departing from CES preferences in an otherwise standard Dixit-Stiglitz setup with additive preferences seems to involve implausible assumptions about consumer behavior and inconsistent competitive effects. In the presence of trade costs, selection effects à la Melitz (2003) are instead generally robust to the assumptions about preferences. However, they are unambiguously associated to aggregate productivity gains only when preferences are CES. We also study competitive effects in alternative monopolistic competition settings featuring non-additive preferences, strategic interaction and consumers’ preference for an ideal variety. We find that none of the these setups delivers a compelling pro-competitive mechanism. Overall, our results suggest that in monopolistic competition, consistent with CES preferences, larger markets select more aggressively on productivity rather than forcing firms to move down their average cost curves.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0004.pdf
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Bibliographic Info

Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 004.

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Length: 38 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:pav:demwpp:demwp0004

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Keywords: Monopolistic Competition; CES Preferences; International Trade; Competitive; Selection and Reallocation Effects.;

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Cited by:
  1. Mrázová, Monika & Neary, J Peter, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," CEPR Discussion Papers 9839, C.E.P.R. Discussion Papers.
  2. repec:hal:wpaper:halshs-00566431 is not listed on IDEAS
  3. Francesco Bogliacino & Giorgio Rampa, 2010. "Monopolistic competition and new products: a conjectural equilibrium approach," Journal of Economic Interaction and Coordination, Springer, vol. 5(1), pages 55-76, June.
  4. Monika Mrázová & J. Peter Neary, 2012. "Selection Effects with Heterogeneous Firms," CEP Discussion Papers dp1174, Centre for Economic Performance, LSE.
  5. Peter Neary & Monika Mrazova, 2013. "Not so demanding: Preference structure, firm behavior, and welfare," Economics Series Working Papers 691, University of Oxford, Department of Economics.
  6. Behrens, Kristian & Pokrovsky, Dmitry & Zhelobodko, Evgeny, 2014. "Market Size, Entrepreneurship, and Income Inequality," CEPR Discussion Papers 9831, C.E.P.R. Discussion Papers.
  7. PARENTI, Mathieu & ,, 2013. "Large and small firms in a global market: David vs. Goliath," CORE Discussion Papers 2013058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Kokovin, Sergey & Thisse, Jacques-François & Zhelobodko, Evgeny, 2010. "Monopolistic Competition: Beyond the CES," CEPR Discussion Papers 7947, C.E.P.R. Discussion Papers.
  9. Enrico Böhme & Christopher Müller, 2013. "Price-Increasing Competition on Two-Sided Markets with Homogeneous Platforms," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 453-479, December.

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