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Monopolistic Competition: A Dual Approach with an Application to Trade

Paolo Bertoletti () and Federico Etro ()

No 2013:09, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms' size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms' size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry. Finally, we provide an application to trade.

Keywords: Monopolistic competition; Indirect additivity; Dixit-Stiglitz model; Endogenous entry (search for similar items in EconPapers)
JEL-codes: D11 D43 F12 L11 (search for similar items in EconPapers)
Pages: 34
Date: 2013
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
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