Working Paper: CEPR ID: DP7947
Authors: Evgeny Zhelobodko; Sergey Kokovin; Jacques-François Thisse
Abstract: 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 priceincreases 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.
Keywords: entry; monopolistic competition; relative love for variety; trade
JEL Codes: D43; F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relative Love for Variety (RLV) increases (D11) | Elasticity of substitution among varieties increases (D11) |
| Elasticity of substitution among varieties increases (D11) | Equilibrium price decreases (D41) |
| Number of firms increases (D21) | Elasticity of substitution among varieties increases (D11) |
| Number of firms increases (D21) | Equilibrium price decreases (D41) |
| Relative Love for Variety (RLV) decreases (D11) | Elasticity of substitution among varieties decreases (D11) |
| Elasticity of substitution among varieties decreases (D11) | Equilibrium price increases (D59) |
| Number of firms increases (D21) | Equilibrium price increases (D59) |
| CES model represents a borderline case where entry does not affect equilibrium prices (D40) | Equilibrium price remains constant (D41) |