Homothetic Non-CES Demand Systems with Applications to Monopolistic Competition

Kiminori Matsuyama

No 19376, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This article reviews homothetic non-CES demand systems and their properties when applied to monopolistic competition, to offer the guidance to those looking for flexible and yet tractable ways of departing from CES. Under general homothetic symmetric non-CES, two measures, substitutability and love-for-variety, are introduced to identity the condition under which the equilibrium product variety is excessive or insufficient. Because homotheticity and symmetry alone impose little restriction to make further progress, we turn to the Homothetic Single Aggregator (H.S.A.) class. H.S.A. is more flexible than CES and translog, which are its special cases, and yet equally analytically tractable, because all cross-variety interactions are summarized by the single aggregator. Under H.S.A., substitutability is increasing in product variety iff Marshall’s 2nd law holds, which is a sufficient condition for love-for-variety to be diminishing in product variety and for the equilibrium product variety to be excessive. H.S.A. remains tractable even under firm heterogeneity.

Keywords: Monopolistic; competition (search for similar items in EconPapers)
Date: 2024-08
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