Working Paper: CEPR ID: DP10014
Authors: Mathieu Parenti; Philip Ushchev; Jacques-François Thisse
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.
Keywords: Additive preferences; General equilibrium; Homothetic preferences; Monopolistic competition
JEL Codes: D43; L11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in total mass of varieties (A30) | decrease in markup (D49) |
| increase in total mass of varieties (A30) | increase in number of firms (L26) |
| elasticity of substitution responds more to changes in mass of varieties (D11) | decrease in markup (D49) |
| elasticity of substitution responds more to changes in mass of varieties (D11) | increase in number of firms (L26) |
| increase in individual income (D31) | entry of new firms (L26) |
| entry of new firms (L26) | affect market prices (D41) |
| entry of new firms (L26) | affect number of varieties available (L15) |