Monopolistic Competition: Beyond the CES

Jacques Thisse, Evgeny Zhelobodko and Sergey Kokovin

No 7947, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium based on an Arrow-Pratt measure of concavity of the utility, interpreted as the relative love for variety. When the relative love for variety increases with the consumption level, the market displays standard competitive effects. On the contrary, when it decreases, the equilibrium price increases with the number of firms and the market size, while the CES is the borderline case. Finally, we apply our setting to trade theory and uncover several new properties hindered by the CES, such as dumping and reverse dumping.

Keywords: Monopolistic competition; Relative love for variety; Entry; Trade (search for similar items in EconPapers)
JEL-codes: D43 F12 L13 (search for similar items in EconPapers)
Date: 2010-08
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Citations: View citations in EconPapers (24)

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