DP7947 Monopolistic Competition: Beyond the CES

Author(s): Sergey Kokovin, Jacques-François Thisse, Evgeny Zhelobodko
Publication Date: August 2010
Keyword(s): entry, monopolistic competition, relative love for variety, trade
JEL(s): D43, F12, L13
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7947

We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium based on an Arrow-Pratt measure of concavity of the utility, interpreted as the relative love for variety. When the relative love for variety increases with the consumption level, the market displays standard competitive effects. On the contrary, when it decreases, the equilibrium price increases with the number of firms and the market size, while the CES is the borderline case. Finally, we apply our setting to trade theory and uncover several new properties hindered by the CES, such as dumping and reverse dumping.