Toward a Theory of Monopolistic Competition

Mathieu Parenti (), Philip Ushchev and Jacques Thisse

HSE Working papers from National Research University Higher School of Economics

Abstract: We propose a general model of monopolistic competition which encompasses existing models while being exible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shock are characterized through necessary and sucient conditions. Furthermore, we show that the attention to the constant elasticity of substitution (CES) based on its normative implications was misguided: constant mark-ups, additivity and homotheticity are neither necessary nor sucient for the market to deliver the optimum outcome. Our approach can cope with heterogeneous rms once it is recognized that the elasticity of substitution is rm-specic. Finally, we show how our set-up can be extended to cope with multiple sectors.

Keywords: monopolistic competition; general equilibrium; additive preferences; homothetic preferences. (search for similar items in EconPapers)
JEL-codes: D43 L11 L13 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in WP BRP Series: Economics / EC, January 2016, pages 1-45

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https://www.hse.ru/data/2016/03/30/1126664798/121EC2016.pdf (application/pdf)

Related works:
Journal Article: Toward a theory of monopolistic competition (2017)
Working Paper: Toward a Theory of Monopolistic Competition (2017)
Working Paper: Toward a theory of monopolistic competition (2017)
Working Paper: Toward a theory of monopolistic competition (2015)
Working Paper: Toward a theory of monopolistic competition (2014)
Working Paper: Toward a theory of monopolistic competition (2014)
Working Paper: Toward a theory of monopolistic competition (2014)
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