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Toward a theory of monopolistic competition

Mathieu Parenti (), Philip Ushchev () and Jacques Thisse ()

Journal of Economic Theory, 2017, vol. 167, issue C, 86-115

Abstract: We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shocks are characterized through necessary and sufficient conditions. Furthermore, we show that the attention to the CES based on its normative implications was misguided: we propose a new class of preferences, which express consumers' uncertainty about their love for variety, that yield variable markups and may sustain the optimum. Last, we show how our approach can cope with heterogeneous firms once it is recognized that the elasticity of substitution is firm-specific.

Keywords: Monopolistic competition; General equilibrium; Additive preferences; Homothetic preferences (search for similar items in EconPapers)
JEL-codes: D43 L11 L13 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Toward a Theory of Monopolistic Competition (2017)
Working Paper: Toward a theory of monopolistic competition (2017)
Working Paper: Toward a Theory of Monopolistic Competition (2016) Downloads
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Working Paper: Toward a theory of monopolistic competition (2014) Downloads
Working Paper: Toward a theory of monopolistic competition (2014) Downloads
Working Paper: Toward a theory of monopolistic competition (2014) Downloads
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