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Monopolistic Competition: A Dual Approach with an Application to Trade


  • Paolo Bertoletti

    () (Department of Economics and Management, University Of Pavia)

  • Federico Etro

    () (Department of Economics, University Of Venice C� Foscari)


We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms' size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms' size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry. Finally, we provide an application to trade.

Suggested Citation

  • Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition: A Dual Approach with an Application to Trade," Working Papers 2013:09, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2013:09

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    References listed on IDEAS

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Federico Etro, 2014. "Optimal Trade Policy under Endogenous Foreign Entry," The Economic Record, The Economic Society of Australia, vol. 90(290), pages 282-300, September.
    2. Osharin Alexander & Verbus Valery, 2015. "Heterogeneous consumers and market structure in a monopolistically competitive setting," EERC Working Paper Series 15/03e, EERC Research Network, Russia and CIS.
    3. Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.
    4. Pokrovsky, D. & Shapoval, A., 2015. "Distribution of Entrepreneurial Skills and Migration: Employment Structure, Income Inequality, and Welfare," Journal of the New Economic Association, New Economic Association, vol. 26(2), pages 36-62.

    More about this item


    Monopolistic competition; Indirect additivity; Dixit-Stiglitz model; Endogenous entry;

    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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