General equilibrium models of monopolistic competition: A new approach

Behrens, Kristian;Murata, Yasusada
(2007) Journal of Economic Theory —

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  • Behrens, Kristian
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  • Murata, Yasusada
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Abstract
We analyze a class of 'large group' Chamberlinian monopolistic competition models by applying different concepts of functional separability to the same set of first-order conditions for utility maximization. We show that multiplicatively quasi-separable (MQS) functions yield 'constant relative risk aversion' (CRRA), and, therefore 'constant elasticity of substitution' (CES), functions, whereas additively quasi-separable (AQS) functions yield 'constant absolute risk aversion' (CARA) functions. We then show that the CARA specification sheds new light on: (i) pro-competitive cffects, i.e., profit-maximizing prices are decreasing in the mass of competing firms; and (ii) a competitive limit, i.e., profit-maximizing prices converge to marginal costs when the mass of competing firms becomes arbitrarily large. (C) 2006 Elsevier Inc. All rights reserved.
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Behrens, K., & Murata, Y. (2007). General equilibrium models of monopolistic competition: A new approach. Journal of Economic Theory. https://doi.org/10.1016/j.jet.2006.10.001