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Pricing to Market in the Krugman Model

  • Paolo Bertoletti

    ()

    (Department of Economics and Management, University of Pavia)

  • Federico Etro

    ()

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

We examine the role of per capita income in closed and open economy models of monopolistic competition based on non-homothetic directly additive preferences a la Dixit-Stiglitz, as in Krugman (1979). In a closed economy with free entry income is always neutral on markups and firm size. In a two-country trade model without transport costs, markups are higher in the country with higher income if the elasticity of substitution is decreasing in consumption. Pricing to market also emerges with transport costs.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0061.pdf
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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 061.

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Length: 10 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:pav:demwpp:demwp0061
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  1. Kristian Behrens & Yasusada Murata, 2009. "Trade, Competition, and Efficiency," Cahiers de recherche 0940, CIRPEE.
  2. Alexander Tarasov, 2014. "Preferences and income effects in monopolistic competition models," Social Choice and Welfare, Springer, vol. 42(3), pages 647-669, March.
  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. George Alessandria & Joseph Kaboski, 2007. "Pricing-to-market and the failure of absolute PPP," Working Papers 07-29, Federal Reserve Bank of Philadelphia.
  5. 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.
  6. ZHELOBODKO, Evgeny & KOKOVIN, Sergey & PARENTI, Mathieu & THISSE, Jean - François, 2011. "Monopolistic competition in general equilibrium: beyond the CES," CORE Discussion Papers 2011010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Paolo Bertoletti & Paolo Epifani, 2012. "Monopolistic Competition: CES Redux?," DEM Working Papers Series 004, University of Pavia, Department of Economics and Management.
  8. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  9. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  10. Bertoletti, Paolo, 2006. "Logarithmic quasi-homothetic preferences," Economics Letters, Elsevier, vol. 90(3), pages 433-439, March.
  11. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  12. Pollak, Robert A, 1972. "Generalized Separability," Econometrica, Econometric Society, vol. 40(3), pages 431-53, May.
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