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Monopolistic competition: Critical evaluation the theory of monopolistic competition with specific reference to the seminal 1977 paper by Dixit and Stiglitz

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  • Josheski, Dushko
  • Koteski, Cane
  • Lazarov, Darko

Abstract

This paper revisits the D-S (Dixit-Stiglitz) model. It’s a simple general monopolistic model with n monopolistic goods, and a numeraire good Labour ( w=1); aggregation for all goods in the economy. We have considered in our paper constant elasticity of substitution case(CES).On the supply side, the assumption is that the labour is perfectly mobile factor of production across the sectors, so as a result in our model there is single wage rate which we denote as in the other sectors than monopolistic there is constant returns to scale and we can specify the production function: The Dixit-Stiglitz model of monopolistic competition works only when n is large; from the functions of the productions best when one applies linear production function. Under increasing returns to scale monopolistic competition will lead to a greater degree of product differentiation than it is socially optimal.

Suggested Citation

  • Josheski, Dushko & Koteski, Cane & Lazarov, Darko, 2011. "Monopolistic competition: Critical evaluation the theory of monopolistic competition with specific reference to the seminal 1977 paper by Dixit and Stiglitz," MPRA Paper 33802, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:33802
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    File URL: https://mpra.ub.uni-muenchen.de/33802/1/MPRA_paper_33802.pdf
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    References listed on IDEAS

    as
    1. Winfried Koeniger & Omar Licandro, "undated". "Substitutability and Competition in the Dixit-Stiglitz Model," Working Papers 2004-06, FEDEA.
    2. Yang, Xiaokai & Heijdra, Ben J, 1993. "Monopolistic Competition and Optimum Product Diversity: Comment," American Economic Review, American Economic Association, vol. 83(1), pages 295-301, March.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1993. "Monopolistic Competition and Optimum Product Diversity: Reply," American Economic Review, American Economic Association, vol. 83(1), pages 302-304, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monopolistic competition; CES; Dixit-Stiglitz model; product differentiation;

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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