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Variety, Globalization, and Social Efficiency

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  • W. Michael Cox
  • Roy J. Ruffin

Abstract

The standard formal presentation of the Dixit‐Stiglitz‐Krugman (DSK) model of monopolistic competition with a constant‐elasticity‐of‐substitution (CES) utility function supposes a sufficient number of firms so that the elasticity of demand facing each variety is approximated by a constant elasticity of substitution. Such a formulation forces economies of scale to be frozen so that firm size never changes. We use a Bertrand‐Nash interpretation of the equilibrium that allows the elasticity of demand facing each variety to depend on the number of varieties, thus allowing the gains from globalization to reflect both the increase in variety and the exploitation of economies of scale. We also develop a precise expression for per capita real income with any number of sectors and examine the age‐old question of the socially optimal number of varieties.

Suggested Citation

  • W. Michael Cox & Roy J. Ruffin, 2010. "Variety, Globalization, and Social Efficiency," Southern Economic Journal, John Wiley & Sons, vol. 76(4), pages 1064-1075, April.
    • Handle: RePEc:wly:soecon:v:76:y:2010:i:4:p:1064-1075
    DOI: 10.4284/sej.2010.76.4.1064
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    Cited by:

    1. Sovik Mukherjee & Vivekananda Mukherjee, 2023. "“Love for variety,” outside option and extensive margin of demand," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 425-449, September.

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