Toward a theory of monopolistic competition

Abstract

We propose a general model of monopolistic competition which encompasses existing models while being exible 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 shock are characterized through necessary and sucient conditions. Furthermore, we show that the attention to the constant elasticity of substitution (CES) based on its normative implications was misguided: constant mark-ups, additivity and homotheticity are neither necessary nor sucient for the market to deliver the optimum outcome. Our approach can cope with heterogeneous rms once it is recognized that the elasticity of substitution is rm-specic. Finally, we show how our set-up can be extended to cope with multiple sectors.

Preferences, entry, and market structure

“…Moreover, it does not address the problem of dependence of symmetric preferences on the number of varieties not (yet) provided by the market. However, Parenti, Ushchev, and Thisse () confirm the three neutralities for the main classes of preferences and independently derive rules for the optimal market structure. Their analysis can be seen as complementary to ours from a methodological point of view because it is done in the limit case of a continuum of goods.…”

Estimating Unequal Gains across U.S. Consumers with Supplier Trade Data

“…All of these cases are possible in general, as highlighted in recent theory (Krugman (1979), Zhelobodko et al (2012, Mrázová and Neary (2017), Parenti et al (2017), Dhingra and Morrow (forthcoming)). As can be seen from differentiating the markup term, firm v's markup is increasing in its quantity sold if˛v < 0, is decreasing in its quantity sold if˛v > 0, and is constant if˛v D 0.…”

Product Differentiation, Competitive Toughness, and Intertemporal Substitution

“…The dynamic behavior of the steady state is driven solely by the characteristics of the demand side: σ , θ , and, to a lesser extent, β . These findings concur with recent work on monopolistic competition under variable elasticity of substitution (Bertoletti and Etro, ; Parenti et al ., ), the main message of this literature being that the demand side has a strong impact on market competition.…”

“…() and Parenti et al . (), who show, using static frameworks, that these two variables always move in the opposite directions. This difference in results is due to the two‐factor nature of our model.…”