Monopolistic competition and income dispersion

Abstract

We develop a model of monopolistic competition that accounts for consumers' heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers' tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.

Clustering or Co-Agglomeration? A Love-for-Variety Approach

“…Therefore, we find it potentially interesting to blend our setting with that developed by Helsley and Strange (2014) in order to obtain further clear-cut theoretical results regarding the conditions of clustering. Another possible line of further inquiry is to study whether the array of city structures arising in equilibrium becomes richer if we allow for heterogeneities across consumers not only in locations, but also in tastes (as in Tarasov, 2014;Osharin et al 2014). We leave these tasks for future research.…”

Heterogeneous Consumers and Trade Patterns in a Monopolistically Competitive Setting

“…Accounting for the heterogeneity in tastes is achieved by assuming different elasticities of substitution in the CES utility function for different consumers and different countries. The modelling strategy used in this paper is similar to that applied to a closed economy case by (Osharin et al, 2014), where an attempt is made to dispense with the representative agent approach which is frequently assumed in literature on monopolistic competition.…”

“…In contrast to the modelling approach applied previously to a closed economy case in (Osharin et al, 2014), the present framework completely neglects the correlation between the income and tastes of consumers. This assumption leaves the investigation of the effects provided by the interaction between income and taste heterogeneities beyond the scope of the present setup, which can be viewed as the main shortcoming of the model.…”

Price Competition in Product Variety Networks

“…A notable exception is , who consider trading countries as nodes of a spatial network and stress the role of Bonacich centrality for understanding the equilibrium trade patterns. Note also that Osharin et al (2014) and Tarasov (2014) study income-taste heterogeneities across consumers within non-spatial settings. Their approaches, however, are substantially different from ours, for the demand side in their model is described by the standard CES utility, hence, any two varieties are equally substitutable.…”