We develop a two-factor, two-sector trade model of monopolistic competition with variable elasticity of substitution. Firm profit and firm size may increase or decrease with market integration depending on the degree of asymmetry between countries. The country in which capital is relatively abundant is a net exporter of the manufactured good, while both firms' size and profits are lower in this country than in the country where capital is relatively scarce. By contrast, the pricing policy adopted by firms does not depend on capital endowment and country asymmetry. It is determined by the nature of preferences: when demand elasticity increases (decreases) with consumption, firms practice dumping (reverse-dumping).
JEL:F12
AbstractWe develop a two-factor, two-sector trade model of monopolistic competition with variable elasticity of sub-
Examining a standard monopolistic competition model with unspecified utility/cost functions, we find necessary and sufficient conditions on their elasticities for welfare losses to arise from trade or market expansion. Two numerical examples explain the losses: excessive or insufficient entry of firms can be aggravated by market enlargement (under unrealistic elasticities).
We develop a monopolistic competition model with heterogeneous agents who self‐select into occupations (entrepreneurs and workers) depending on innate ability. The effect of market size on the equilibrium occupational structure crucially hinges on properties of the lower tier utility function—its scale elasticity and relative love‐for‐variety. When combined with the underlying ability distribution, the share of entrepreneurs and income inequality can increase or decrease with market size. When extended to allow for the endogenous sorting of mobile agents between cities, numerical examples suggest that sorting may increase inequality within and between cities.
We study Krugman's core–periphery (CP) model for most general cases of nonidentical regions and fully characterize instant and long‐run equilibria. Assuming immobility of labor, we describe the behavior of equilibrium wages/real wages. Moreover, the relative wages/real wages of industrial workers can both increase and decrease with the population with which they are associated. Under the assumption of industrial labor mobility, possible patterns of economic evolution, as responses to trade freeness, are fully described. We show that in the case of noticeable agricultural asymmetry, all mobile labor inevitably accumulates in countries with larger agricultural populations.
This paper compares the market equilibria in a differentiated industry under Cournot, Bertrand, and monopolistic competition. This is accomplished in a one‐sector economy where consumers are endowed with separable preferences. When firms are free to enter the market, monopolistically competitive firms charge lower prices than oligopolistic firms, while the mass of varieties provided by the market is smaller under the former than the latter. If the economy is sufficiently large, Cournot, Bertrand and Chamberlin solutions converge toward the same market outcome, which may be a competitive or a monopolistically competitive equilibrium, depending on the nature of preferences.
In Russia, chain stores have achieved considerable market power. In this work, we combine a Dixit-Stiglitz industry model with a monopolistic retailer in order to address the following questions: does the retailer always impair prices, variety of goods, and ultimately welfare? Which market structure is worse: Nash or Stackelberg? What should be the public policy in this area?
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