DP14168 Decoupling the CES distribution circle with quality and beyond: equilibrium distributions and the CES-Logit nexus
|Author(s):||Simon P Anderson, Andre De palma|
|Publication Date:||December 2019|
|Keyword(s):||Box-Cox, CES, closed power-family distributions, generalised (log-)normal, Logit, Mark-ups, monopolistic competition, Pareto, Power, Quality|
|Programme Areas:||Industrial Organization, International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14168|
We show for CES demands with heterogeneous productivities that profit, revenue, and output distributions lie in the same closed power-family as the productivity distribution (e.g., the "Pareto circle"). The price distribution lies in the inverse power-family. Equilibrium distribution shapes are linked by linear relations between their density elasticities. Introducing product quality decouples the CES circle, and reconciles Pareto price and Pareto sales revenue distributions. We use discrete choice underpinnings to find variable mark-ups for a more flexible demand formulation bridging CES to Logit and beyond. For logit demand, exponential (resp. normal) quality-cost distributions generate Pareto (log-normal) economic size distributions.