DP10748 Economic distributions and primitive distributions in monopolistic competition

Author(s): Simon P Anderson, André de Palma
Publication Date: August 2015
Keyword(s): ces, general monopolistic competition model, logit, pareto and log-normal distribution, price and profit dispersion, primitive and economic distributions
JEL(s): L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10748

We link fundamental technological and taste distributions to endogenous economic distributions of firm size (output, profit) and prices in extensions of canonical IO and Trade models. We develop a continuous logit model of monopolistic competition to show that exponential or normal distributions respectively generate Pareto or log-normal economic size distributions. Two groups of distributions (output, profit, and quality-cost; and price and cost) are linked through the technological relation between cost and quality-cost. We formulate a general monopolistic competition model and recover the demand structure, mark-ups, and the quality-cost distribution from the output and profit distributions. Adding the price distribution recovers the cost distribution and the relation between quality-cost and cost. We also find long-run equilibrium distributions as a function of the primitives. On the Trade side, we provide a parallel analysis for the CES and break the Pareto circle by introducing quality.