|Tarasov, Alexander (2010): Consumer Preferences in Monopolistic Competition Models. Discussion Papers in Economics 2010-25|
This paper develops a novel approach to modeling references in monopolistic competition models with a continuum of goods. In contrast to the commonly used CES preferences, which do not capture the e¤ects of consumer income and the intensity of competition on equilibrium prices, the present preferences can capture both effects. I show that under an unrestrictive regularity assumption, the equilibrium prices decrease with the total mass of available goods (which represents the intensity of competition in the model) and increase with consumer income. The former implies that the entry of �rms in the market or opening a country to international trade has a pro-competitive effect that decreases equilibrium prices.
|Item Type:||Paper (Discussion Paper)|
|Keywords:||fi�rm prices; intensity of competition; consumer income|
Economics > Discussion Papers in Economics
|Subjects:||300 Social sciences > 300 Social sciences, sociology and anthropology|
300 Social sciences > 330 Economics
|Deposited On:||30. Apr 2010 21:38|
|Last Modified:||27. Nov 2013 20:52|
Anderson S., A. de Palma and J.-F. Thisse, (1992) "Discrete Choice Theory of Product Differentiation", Cambridge (Mass.), MIT Press.
Dixit, A. and Stiglitz, J. (1977), "Monopolistic Competition and Optimum Product Diversity", American Economic Review, 67(3), 297-308.
Foellmi, R. and Zweimueller, J. (2006), "Income Distribution and Demand-induced Innovations", Review of Economic Studies, 73(4), 941-960.
Hummels, D. and Lugovskyy, V. (2008), "International Pricing in a Generalized Model of Ideal Variety", Journal of Money, Credit, and Banking, forthcoming.
Melitz, M. and Ottaviano, G. (2008), "Market Size, Trade, and Productivity", Review of Economic Studies, 75(1), 295-316.
Perloff, J. and Salop, S. (1985), "Equilibrium with Product Differentiation", Review of Economic Studies, 52(1), 107-120.
Saure, P. (2009), "Bounded Love of Variety and Patterns of Trade", Swiss National Bank, mimeo.
Simonovska, I. (2009), "Income Differences and Prices of Tradables", mimeo.
Singh, S. and Maddala, G. (1976), "A function for size distributions of incomes", Econometrica, 44, 963�970.
Tarasov, A. (2007), "Income Distribution, Market Structure, and Individual Welfare", mimeo.
Van den Berg, J. (2007), "On the Uniqueness of Optimal Prices Set by Monopolistic Sellers", Journal of Econometrics, 141, 482�491
Verhoogen, E. (2008), "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector", Quarterly Journal of Economics, 123(2), 489-530.