Toward a theory of monopolistic competitionMathieu Parenti (), Philip Ushchev and Jacques Thisse Journal of Economic Theory, 2017, vol. 167, issue C, 86-115 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. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shocks are characterized through necessary and sufficient conditions. Furthermore, we show that the attention to the CES based on its normative implications was misguided: we propose a new class of preferences, which express consumers' uncertainty about their love for variety, that yield variable markups and may sustain the optimum. Last, we show how our approach can cope with heterogeneous firms once it is recognized that the elasticity of substitution is firm-specific. Keywords: Monopolistic competition; General equilibrium; Additive preferences; Homothetic preferences (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:167:y:2017:i:c:p:86-115 DOI: 10.1016/j.jet.2016.10.005 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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