A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers
Alexander Tarasov () and
Philip Ushchev ()
No 8082, CESifo Working Paper Series from CESifo
Our novel approach to modeling monopolistic competition with heterogeneous consumers involves a space of characteristics of a differentiated good (consumers’ ideal points), alike Hotelling (1929). Firms have heterogeneous costs à la Melitz (2003). In addition to price setting, each firm also chooses its optimal location/niche in this space. We formulate conditions for positive sorting: more efficient firms serve larger market segments and face tougher competition in the equilibrium. Our framework entails rich equilibrium patterns displaying non-monotonic markups, high in the most and least populated niches, and the unequal gains from trade across different consumers.
Keywords: firm heterogeneity; product space; positive sorting; product niches (search for similar items in EconPapers)
JEL-codes: F10 L11 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8082
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