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A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers

Sergey Kokovin, Shamil Sharapudinov, Alexander Tarasov () and Philip Ushchev ()

No 8082, CESifo Working Paper Series from CESifo

Abstract: 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)
Date: 2020
New Economics Papers: this item is included in nep-bec, nep-com and nep-mic
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