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Monopolistic Competition: A Dual Approach with an Application to Trade

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  • Paolo Bertoletti

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

  • Federico Etro

    ()
    (Department of Economics, University Of Venice Cà 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. Finally, we provide an application to trade.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2013/WP_DSE_bertoletti_etro_09_13.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2013:09.

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Length: 34
Date of creation: 2012
Date of revision:
Handle: RePEc:ven:wpaper:2013:09

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Keywords: Monopolistic competition; Indirect additivity; Dixit-Stiglitz model; Endogenous entry;

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