Heterogeneous consumers and market structure in a monopolistically competitive setting

Alexander Osharin and Verbus Valery ()

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: The present paper extends the traditional Dixit and Stiglitz set-up by introducing consumers’/workers’ heterogeneity into a general equilibrium model of monopolistic competition. The model obtains a closed-form solution for a symmetric equilibrium and shows how the market outcome depends on the joint distribution of consumers’/workers’ taste and labor productivities. In contrast to the traditional framework, our model predicts that the short-run equilibrium price may vary with the number of firms, demonstrating both anti- and pro-competitive behavior, which is in accordance with economic intuition and empirical evidence. Proposed approach is also capable to explain variability of the long-run equilibrium markups, which is observed empirically. Unlike the standard CES model, where markups are constant, in our setting the equilibrium markups depend on the covariance of tastes and productivity.

JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2015-10-06
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