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Monopolistic Competition when Income Matters

Author

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  • Paolo Bertoletti

    () (Department of Economics and Management, University of Pavia)

  • Federico Etro

    () (Department of Economics, University of Venice Ca' Foscari)

Abstract

We study monopolistic competition with preferences over differentiated goods characterized by a separable indirect utility rather than a separable direct utility as in the Dixit-Stiglitz model, with the CES case as the only common ground. Examples include linear and log-linear direct demands. In equilibrium with free entry, an increase of the number of consumers is neutral on prices, but increases proportionally the number of firms, just creating pure gains from variety. Contrary to the Dixit-Stiglitz model, an increase in consumer income increases prices and more than proportionally the number of varieties if and only if the price elasticity of demand is increasing. We also discuss extensions to an outside good, heterogeneous consumers, heterogeneous firms à la Melitz and endogenous quality. Finally, we provide an application to international trade generating pricing to market in a generalized Krugman model.

Suggested Citation

  • Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition when Income Matters," DEM Working Papers Series 055, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:demwp0055
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    Cited by:

    1. Osharin, Alexander & Thisse, Jacques-François & Ushchev, Philip & Verbus, Valery, 2014. "Monopolistic competition and income dispersion," Economics Letters, Elsevier, vol. 122(2), pages 348-352.
    2. Jacques-Francois Thisse & Philip Ushchev, 2016. "Monopolistic Competition Without Apology," HSE Working papers WP BRP 141/EC/2016, National Research University Higher School of Economics.
    3. Parenti, Mathieu & Ushchev, Philip & Thisse, Jacques-François, 2017. "Toward a theory of monopolistic competition," Journal of Economic Theory, Elsevier, vol. 167(C), pages 86-115.
    4. Boucekkine, Raouf & Latzer, Hélène & Parenti, Mathieu, 2017. "Variable markups in the long-run: A generalization of preferences in growth models," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 80-86.
    5. Jacques-Francois Thisse & Philip Ushchev, 2016. "When Can A Demand System Be Described By A Multinomial Logit With Income Effect?," HSE Working papers WP BRP 139/EC/2016, National Research University Higher School of Economics.
    6. Paolo Bertoletti & Federico Etro, 2014. "Pricing to market in the Krugman model," Economics Bulletin, AccessEcon, vol. 34(1), pages 459-468.
    7. repec:aea:aecrev:v:107:y:2017:i:12:p:3835-74 is not listed on IDEAS
    8. Etro, Federico & Rossi, Lorenza, 2015. "Optimal monetary policy under Calvo pricing with Bertrand competition," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 423-440.
    9. repec:eee:reecon:v:71:y:2017:i:4:p:650-652 is not listed on IDEAS
    10. E. Weyl & Michal Fabinger, 2015. "A Tractable Approach to Pass-Through Patterns," 2015 Meeting Papers 747, Society for Economic Dynamics.
    11. Monika Mrázová & J. Peter Neary, 2017. "Not So Demanding: Demand Structure and Firm Behavior," American Economic Review, American Economic Association, vol. 107(12), pages 3835-3874, December.
    12. Anderson, Simon P & de Palma, André, 2015. "Economic distributions and primitive distributions in monopolistic competition," CEPR Discussion Papers 10748, C.E.P.R. Discussion Papers.
    13. Etro, Federico, 2016. "The Ramsey model with monopolistic competition and general preferences," Economics Letters, Elsevier, vol. 145(C), pages 141-144.
    14. Brander, James A. & Spencer, Barbara J., 2015. "Intra-industry trade with Bertrand and Cournot oligopoly: The role of endogenous horizontal product differentiation," Research in Economics, Elsevier, vol. 69(2), pages 157-165.
    15. Ina Simonovska, 2015. "Income Differences and Prices of Tradables: Insights from an Online Retailer," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1612-1656.
    16. repec:eee:ecolet:v:158:y:2017:i:c:p:26-29 is not listed on IDEAS
    17. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," NBER Working Papers 14383, National Bureau of Economic Research, Inc.
    18. Nikita Malykhin & Philip Ushchev, 2016. "Clustering or Co-Agglomeration? A Love-for-Variety Approach," HSE Working papers WP BRP 140/EC/2016, National Research University Higher School of Economics.
    19. Etro, Federico, 2017. "The Heckscher–Ohlin model with monopolistic competition and general preferences," Economics Letters, Elsevier, vol. 158(C), pages 26-29.

    More about this item

    Keywords

    Monopolistic competition; Indirect additivity; Non-homotheticity; Pricing to market; Krugman model; Melitz model;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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

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