Working Paper: CEPR ID: DP14168
Authors: Simon P. Anderson; Andre de Palma
Abstract: We show for CES demands with heterogeneous productivities that profit, revenue, andoutput 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. Equilib-rium distribution shapes are linked by linear relations between their density elasticities.Introducing product quality decouples the CES circle, and reconciles Pareto price andPareto sales revenue distributions. We use discrete choice underpinnings to find variablemark-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.
Keywords: CES; monopolistic competition; quality; closed power family distributions; Pareto; power; generalized lognormal; logit markups; Box-Cox
JEL Codes: L13; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| profit distribution (D33) | productivity distribution (D39) |
| revenue distribution (D39) | productivity distribution (D39) |
| output distribution (C67) | productivity distribution (D39) |
| output distribution (C67) | unit costs distribution (D39) |
| product quality (L15) | CES circle (D58) |
| product quality (L15) | distribution shapes (D39) |