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Toward a theory of monopolistic competition

Mathieu Parenti (), Philip Ushchev () and Jacques Thisse

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: We propose a general model of monopolistic competition, which encompasses existing models while being flexible 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 shocks are characterized through necessary and sufficient conditions. Furthermore, we show that the attention to the CES based on its normative implications was misguided: we propose a new class of preferences, which express consumers' uncertainty about their love for variety, that yield variable markups and may sustain the optimum. Last, we show how our approach can cope with heterogeneous firms once it is recognized that the elasticity of substitution is firm-specific.

Keywords: Monopolistic; competition; and; General; equilibrium; and; Additive; preferences; and; Homothetic; preferences (search for similar items in EconPapers)
Date: 2017
Note: SCOPUS: ar.j
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Published in: Journal of economic theory (2017) v.167,p.86-115

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Journal Article: Toward a theory of monopolistic competition (2017) Downloads
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