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Monopolistic competition and income dispersion

  • OSHARIN, Alexander

    ()

    (NRU-Higher School of Economics, Russia)

  • THISSE, Jacques-François

    ()

    (Université catholique de Louvain, CORE, Belgium)

  • USHCHEV, Philip

    ()

    (NRU-Higher School of Economics, Russia)

  • VERBUS, Valery

    ()

    (NRU-Higher School of Economics, Russia)

We develop a model of monopolistic competition that accounts for consumers' heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers' tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013071.

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Date of creation: 31 Dec 2013
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Handle: RePEc:cor:louvco:2013071
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  1. Stephen J Redding & Peter K Schott & Andrew B Bernard, 2007. "Multi-product Firms and Trade Liberalization," 2007 Meeting Papers 44, Society for Economic Dynamics.
  2. Di Comite, Francesco & Thisse, Jacques-François & Vandenbussche, Hylke, 2014. "Verti-zontal differentiation in export markets," Journal of International Economics, Elsevier, vol. 93(1), pages 50-66.
  3. Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition when Income Matters," DEM Working Papers Series 055, University of Pavia, Department of Economics and Management.
  4. James R. Markusen, 2010. "Putting Per-Capita Income Back into Trade Theory," NBER Working Papers 15903, National Bureau of Economic Research, Inc.
  5. Behrens, Kristian & Murata, Yasusada, 2007. "General equilibrium models of monopolistic competition: A new approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 776-787, September.
  6. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721 - 765.
  7. Hildenbrand, Werner, 1983. "On the "Law of Demand."," Econometrica, Econometric Society, vol. 51(4), pages 997-1019, July.
  8. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  9. Foellmi, Reto & Zweimuller, Josef, 2004. "Inequality, market power, and product diversity," Economics Letters, Elsevier, vol. 82(1), pages 139-145, January.
  10. Tarasov, Alexander, 2009. "Consumer Preferences in Monopolistic Competition Models," MPRA Paper 19990, University Library of Munich, Germany.
  11. Yurko, Anna V., 2011. "How does income inequality affect market outcomes in vertically differentiated markets?," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 493-503, July.
  12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  13. Jean-Michel Grandmont, 1984. "Distribution of Preferences and the 'Law of Demand'," Working papers 356, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
  15. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  16. Corrado Benassi & Alessandra Chirco & Caterina Colombo, 2005. "A Model Of Monopolistic Competition With Personal Income Dispersion," Metroeconomica, Wiley Blackwell, vol. 56(3), pages 305-317, 07.
  17. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques‐François Thisse, 2012. "Monopolistic Competition: Beyond the Constant Elasticity of Substitution," Econometrica, Econometric Society, vol. 80(6), pages 2765-2784, November.
  18. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
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