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Economic distributions and primitive distributions in monopolistic competition

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  • Anderson, Simon
  • de Palma, André

Abstract

We link fundamental technological and taste distributions to endogenous economic distributions of firm size (output, profit) and prices in extensions of canonical IO and Trade models. We develop a continuous logit model of monopolistic competition to show that exponential or normal distributions respectively generate Pareto or log-normal economic size distributions. Two groups of distributions (output, profit, and quality-cost; and price and cost) are linked through the technological relation between cost and quality-cost. We formulate a general monopolistic competition model and recover the demand structure, mark-ups, and the quality-cost distribution from the output and profit distributions. Adding the price distribution recovers the cost distribution and the relation between quality-cost and cost. We also find long-run equilibrium distributions as a function of the primitives. On the Trade side, we provide a parallel analysis for the CES and break the Pareto circle by introducing quality.

Suggested Citation

  • Anderson, Simon & de Palma, André, 2015. "Economic distributions and primitive distributions in monopolistic competition," CEPR Discussion Papers 10748, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10748
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    References listed on IDEAS

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    1. 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.
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    3. Anderson, Simon P. & de Palma, Andre, 2000. "From local to global competition," European Economic Review, Elsevier, vol. 44(3), pages 423-448, March.
    4. Paolo Bertoletti & Federico Etro, 2017. "Monopolistic Competition when Income Matters," Economic Journal, Royal Economic Society, vol. 127(603), pages 1217-1243, August.
    5. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    6. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    7. 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.
    8. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    9. Robert C. Feenstra & John Romalis, 2014. "International Prices and Endogenous Quality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 477-527.
    10. Swati Dhingra & John Morrow, 2019. "Monopolistic Competition and Optimum Product Diversity under Firm Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 196-232.
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    Cited by:

    1. Simon P Anderson & André de Palma, 2020. "Decoupling the CES Distribution Circle with Quality and Beyond: Equilibrium Distributions and the CES-Logit Nexus," The Economic Journal, Royal Economic Society, vol. 130(628), pages 911-936.
    2. Federico Etro, 2023. "Hybrid Marketplaces with Free Entry of Sellers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(2), pages 119-148, March.
    3. Anderson, Simon & Bedre-Defolie, Özlem, 2022. "Online trade platforms: Hosting, selling, or both?," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    4. André De Palma & Simon P. Anderson, 2021. "Economic distributions, primitive distributions, and demand recovery in Monopolistic Competition," THEMA Working Papers 2021-03, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    5. Görg, Holger & Henze, Philipp & Jienwatcharamongkhol, Viroj & Kopasker, Daniel & Molana, Hassan & Montagna, Catia & Sjöholm, Fredrik, 2017. "Firm size distribution and employment fluctuations: Theory and evidence," Research in Economics, Elsevier, vol. 71(4), pages 690-703.

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    More about this item

    Keywords

    Primitive and economic distributions; Price and profit dispersion; General monopolistic competition model; Pareto and log-normal distribution; Logit; Ces;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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