Discussion Paper Details

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Title: Toward a theory of monopolistic competition

Author(s): Mathieu Parenti, Jacques-François Thisse and Philip Ushchev

Publication Date: June 2014

Keyword(s): additive preferences, general equilibrium, homothetic preferences and monopolistic competition

Programme Area(s): Industrial Organization and International Trade and Regional Economics

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. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sufficient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers.

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Bibliographic Reference

Parenti, M, Thisse, J and Ushchev, P. 2014. 'Toward a theory of monopolistic competition'. London, Centre for Economic Policy Research.