Monopolistic competition: beyond the constant elasticity of substitution

Zhelobodko, Evgeny;Kokovin, Sergey;Parenti, Mathieu;Thisse, Jacques-François
(2012) Econometrica — Vol. 80, n° 6, p. 2765-2784 (2012)

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Authors
  • Zhelobodko, EvgenyNovosibirsk State University and National Research University, St-Petersburg
    Author
  • Kokovin, SergeyNovosibirsk State University and National Research University, St-Petersburg
    Author
  • Parenti, MathieuUCLouvain
    Author
  • Thisse, Jacques-FrançoisUCLouvain
    Author
Abstract
We propose a model of monopolistic competition with additive preferences and variable marginal costs. Using the concept of “relative love for variety,” we provide a full characterization of the free-entry equilibrium.When the relative love for variety increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The constant elasticity of substitution is the only case in which all competitive effects are washed out. We also show that our results hold true when the economy involves several sectors, firms are heterogeneous, and preferences are given by the quadratic utility and the translog.
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Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J.-F. (2012). Monopolistic competition: beyond the constant elasticity of substitution. Econometrica, 80(6), 2765-2784. https://doi.org/10.3982/ECTA9986 (Original work published 2012)