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Monopolistic Competition: A Dual Approach

Author

Listed:
  • Paolo Bertoletti

    (Department of Economics and Management, University of Pavia)

  • Federico Etro

    (Department of Economics, University of Venice Ca' Foscari)

Abstract

We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms’ size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms’ size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry.

Suggested Citation

  • Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition: A Dual Approach," DEM Working Papers Series 043, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0043
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0043.pdf
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    Citations

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    Cited by:

    1. Federico Etro, 2014. "Optimal Trade Policy under Endogenous Foreign Entry," The Economic Record, The Economic Society of Australia, vol. 90(290), pages 282-300, September.
    2. Goncharenko, V. & Shapoval, A., 2018. "Impact of Demand Structure and Market Size on Unemployment, Income Inequality and Social Welfare," Journal of the New Economic Association, New Economic Association, vol. 37(1), pages 12-33.
    3. Duan Lianjie, 2019. "A Two-factor Model of Intra-industry Trade: A Demonstration of Robustness of Krugman’s (1980) Model," Journal of Systems Science and Information, De Gruyter, vol. 7(5), pages 422-436, October.
    4. Monika Mrázová & J. Peter Neary, 2017. "Not So Demanding: Demand Structure and Firm Behavior," American Economic Review, American Economic Association, vol. 107(12), pages 3835-3874, December.
    5. Osharin Alexander & Verbus Valery, 2015. "Heterogeneous consumers and market structure in a monopolistically competitive setting," EERC Working Paper Series 15/03e, EERC Research Network, Russia and CIS.
    6. Peter Neary & Monika MrázováMathieu Parenti, 2015. "Technology, Demand, And The Size Distribution Of Firms," Economics Series Working Papers 774, University of Oxford, Department of Economics.
    7. Pokrovsky, D. & Shapoval, A., 2015. "Distribution of Entrepreneurial Skills and Migration: Employment Structure, Income Inequality, and Welfare," Journal of the New Economic Association, New Economic Association, vol. 26(2), pages 36-62.

    More about this item

    Keywords

    Monopolistic competition; Indirect additivity; Dixit-Stiglitz model; Endogenous entry;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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