Monopolistic Competition: A Dual Approach with an Application to Trade
AbstractWe 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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Bibliographic InfoPaper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2013:09.
Date of creation: 2012
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Monopolistic competition; Indirect additivity; Dixit-Stiglitz model; Endogenous entry;
Find related papers by JEL classification:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-BEC-2013-06-04 (Business Economics)
- NEP-COM-2013-06-04 (Industrial Competition)
- NEP-IND-2013-06-04 (Industrial Organization)
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- Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.
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