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Consumer Preferences in Monopolistic Competition Models

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  • Tarasov, Alexander

Abstract

This paper develops a novel approach to modeling preferences in monopolistic competition models with a continuum of goods. In contrast to the commonly used CES preferences, which do not capture the effects of consumer income and the intensity of competition on equilibrium prices, the present preferences can capture both effects. I show that under an unrestrictive regularity assumption, the equilibrium prices decrease with the total mass of available goods (which represents the intensity of competition in the model) and increase with consumer income. The former implies that the entry of firms in the market or opening a country to international trade has a pro-competitive effect that decreases equilibrium prices.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19990.

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Date of creation: Nov 2009
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Handle: RePEc:pra:mprapa:19990

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Keywords: firm prices; intensity of competition; consumer income.;

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  1. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers, Society for Economic Dynamics 692, Society for Economic Dynamics.
  2. Eric Verhoogen, 2007. "Trade, quality upgrading and wage inequality in the Mexican manufacturing sector," Discussion Papers, Columbia University, Department of Economics 0607-08, Columbia University, Department of Economics.
  3. van den Berg, Gerard J, 2005. "On the Uniqueness of Optimal Prices Set by Monopolistic Sellers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5166, C.E.P.R. Discussion Papers.
  4. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  5. Tarasov, Alexander, 2009. "Income distribution, market structure, and individual welfare," Munich Reprints in Economics, University of Munich, Department of Economics 19578, University of Munich, Department of Economics.
  6. Philip Sauré, 2012. "Bounded Love of Variety and Patterns of Trade," Open Economies Review, Springer, Springer, vol. 23(4), pages 645-674, September.
  7. Foellmi, Reto & Zweimüller, Josef, 2005. "Income Distribution and Demand-Induced Innovations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4985, C.E.P.R. Discussion Papers.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 64, University of Warwick, Department of Economics.
  9. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," Development Working Papers, Centro Studi Luca d\'Agliano, University of Milano 201, Centro Studi Luca d\'Agliano, University of Milano.
  10. David Hummels & Volodymyr Lugovskyy, 2009. "International Pricing in a Generalized Model of Ideal Variety," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(s1), pages 3-33, 02.
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Cited by:
  1. Osharin, Alexander & Thisse, Jacques-François & Ushchev, Philip & Verbus, Valery, 2014. "Monopolistic competition and income dispersion," Economics Letters, Elsevier, Elsevier, vol. 122(2), pages 348-352.

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