On the effects of income heterogeneity in monopolistically competitive markets

Sergey Kichko and Pierre Picard

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper studies the market and welfare effects of income heterogeneity in monopo- listically competitive product markets in the context of nonhomothetic preferences. In a closed economy, where richer individuals' expenditures are less sensitive to price change compared to poorer ones', a mean-preserving contraction of income distribution entices firms to charge higher markups, reduce output, and fosters creation of new varieties. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on the whole population. In an open economy with free trade, lower in- come inequality in one country creates price divergence between trading countries. Lower inequality not only further decreases trade volumes and values but also creates a general equilibrium effect that may negatively affect poor individuals. Finally, general equilibrium effects are shown to be quantitatively nonnegligible.

Keywords: Monopolistic competition; nonhomothetic additive preferences; income inequality; pricing-to-markets; welfare; trade. (search for similar items in EconPapers)
JEL-codes: D43 F12 L16 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-com and nep-reg
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http://hdl.handle.net/10993/55166 (application/pdf)

Related works:
Journal Article: On the effects of income heterogeneity in monopolistically competitive markets (2023)
Working Paper: On the Effects of Income Heterogeneity in Monopolistically Competitive Markets (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:23-02

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