When Ricardo Meets Chamberlin: A Simple Dynamic Model Of Monopolistic Competition

Vera Ivanova () and Philip Ushchev

HSE Working papers from National Research University Higher School of Economics

Abstract: We develop a dynamic model of monopolistic competition which sheds light on how the interplay between the degree of product dierentiation and intertemporal elasticity of substitution aects the steady-state equilibrium. Consumers love variety and split their labor endowment between wage labor, which brings immediate income, and producing capital, which yields a rent in the future. The impact of the elasticity of substitution across varieties on the market outcome depends crucially on whether consumption today and consumption tomorrow are gross substitutes or gross complements. The case of Cobb-Douglas intertemporal utility is a borderline situation, when the market outcome is invariant to the degree of product dierentiation. We also fully characterize the unique steady-state equilibrium path and show that the key dynamic properties of the model, such as local stability and determinacy of equilibrium, also hinge mainly on the interplay between the intra- and intertemporal elasticities of substitution.

Keywords: intertemporal choice; intertemporal elasticity of substitution; love for variety; product dierentiation; toughness of competition; overlapping generations; capital; structural instability. (search for similar items in EconPapers)
JEL-codes: D43 D90 D91 L13 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015
New Economics Papers: this item is included in nep-com and nep-dge
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Published in WP BRP Series: Economics / EC, October 2015, pages 1-26

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