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Taste for variety and endogenous fluctuations in a monopolistic competition model

Thomas Seegmuller ()

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost) and monopoly profits affect the occurence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety due to endogenous product diversity. Introducing monopolistic competition (Dixit and Stiglitz (1977), Benassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity which has a direct influence on the real wage and the real interest rate

Keywords: Endogenous fluctuations; taste for variety; imperfect competition (search for similar items in EconPapers)
JEL-codes: C62 D43 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2007-01
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ftp://mse.univ-paris1.fr/pub/mse/CES2007/V07004.pdf (application/pdf)

Related works:
Journal Article: TASTE FOR VARIETY AND ENDOGENOUS FLUCTUATIONS IN A MONOPOLISTIC COMPETITION MODEL (2008) Downloads
Working Paper: Taste for Variety and Endogenous Fluctuations in a Monopolistic Competition Model (2008) Downloads
Working Paper: Taste for variety and endogenous fluctuations in a monopolistic competition model (2007) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:v07004

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