A MODEL OF MONOPOLISTIC COMPETITION WITH PERSONAL INCOME DISPERSION

Corrado Benassi, Alessandra Chirco () and Caterina Colombo ()

Metroeconomica, 2005, vol. 56, issue 3, 305-317

Abstract: We introduce non‐homothetic preferences in the Dixit–Stiglitz model of monopolistic competition, and enquire about the effects of a change in income dispersion on the firms’ optimal decisions and market equilibrium. Income dispersion, modeled as a mean preserving spread, is shown to affect only the degree of product differentiation under the standard negligibility hypothesis on the firms’ decision making process, while it generates a positive co‐movement of demand and demand elasticity, when this assumption is removed and the price index effect is taken into account.

Date: 2005
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https://doi.org/10.1111/j.1467-999X.2005.00218.x

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