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Pricing to Market in the Krugman Model

Author

Listed:
  • Paolo Bertoletti

    (Department of Economics and Management, University of Pavia)

  • Federico Etro

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

Abstract

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.

Suggested Citation

  • Paolo Bertoletti & Federico Etro, 2013. "Pricing to Market in the Krugman Model," DEM Working Papers Series 061, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0061
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    Keywords

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    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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