Pricing to Market in the Krugman Model
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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Munich Reprints in Economics
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Cahiers de recherche
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"Monopolistic Competition and Optimum Product Diversity,"
The Warwick Economics Research Paper Series (TWERPS)
64, University of Warwick, Department of Economics.
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