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General equilibrium models of monopolistic competition: CRRA versus CARA

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  • BEHRENS, Kristian
  • MURATA, Yasusada

Abstract

We analyze a class of "large group" Chamberlinian monopolistic competition models using multiplicatively quasi-separable (MQS) and additively quasi-separable (AQS) functions. We first prove that the MQS and AQS functions are equivalent to the "constant relative risk aversion" (CRRA) and "constant absolute risk aversion" (CARA) classes of functions, respectively. Whereas both approaches allow for closed-form solutions, only the AQS functions yield profit-maximizing prices that decrease in the mass of competing firms. We then characterize the equilibrium in both cases and discuss some possible applications of the AQS framework to trade, growth, and development.

Suggested Citation

  • BEHRENS, Kristian & MURATA, Yasusada, 2005. "General equilibrium models of monopolistic competition: CRRA versus CARA," CORE Discussion Papers 2005033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2005033
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-2005.html
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    References listed on IDEAS

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    Cited by:

    1. Masahisa Fujita & Tomoya Mori, 2005. "Frontiers of the New Economic Geography-super-," Papers in Regional Science, Wiley Blackwell, vol. 84(3), pages 377-405, August.

    More about this item

    Keywords

    monopolistic competition; general equilibrium; price equilibrium; additive quasi-separability; multiplicative quasi-separability.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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