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Income Distribution, Market Structure, and Individual Welfare

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  • Tarasov, Alexander

Abstract

This paper explores how income distribution influences market structure and affects the economic well-being of different groups. It shows that inequality may be good for the poor via a trickle-down effect operating through entry. I consider a general equilibrium model of monopolistic competition with free entry, heterogenous firms and consumers that share identical but non-homothetic preferences. The general model is solved. The case of two types of consumers, rich and poor, is considered in detail. I show that higher income inequality in the economy can benefit the poor. An increase in the personal income of the rich raises welfare of the poor, while an increase in the fraction of the rich has an ambiguous impact on the poor: welfare of the poor has an inverted U shape as a function of the fraction of the rich. At the same time, an increase in the personal income of the rich together with a decrease in the fraction of the rich keeping the aggregate income in the economy fixed raises the well-being of the poor. I also analyze the effect of changes in market size and entry cost. I show that the rich gain more from an increase in market size and lose more from an increase in the cost of entry than the poor.

Suggested Citation

  • Tarasov, Alexander, 2007. "Income Distribution, Market Structure, and Individual Welfare," MPRA Paper 7682, University Library of Munich, Germany, revised Jan 2008.
  • Handle: RePEc:pra:mprapa:7682
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    References listed on IDEAS

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    1. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1253-1271, November.
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    Cited by:

    1. Alexander Tarasov, 2012. "Trade Liberalization and Welfare Inequality: A Demand-Based Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(4), pages 1296-1317, December.
    2. Sergey G. Kokovin & Shamil Sharapudinov & Alexander Tarasov & Philip Ushchev, 2020. "A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers," CESifo Working Paper Series 8082, CESifo.
    3. Tarasov, Alexander, 2009. "Consumer Preferences in Monopolistic Competition Models," MPRA Paper 19990, University Library of Munich, Germany.
    4. Alexander Tarasov, 2014. "Preferences and income effects in monopolistic competition models," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(3), pages 647-669, March.
    5. Namrata Gulati & Prabal Roy Chowdhury, 2010. "Income inequality, neighbourhood effects and product quality," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 10-06, Indian Statistical Institute, New Delhi, India.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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