Monopolistic Competition: Beyond the Constant Elasticity of Substitution

Authors

  • Evgeny Zhelobodko,

    1. Novosibirsk State University, 630090, Novosibirsk, Pirogova 2, Russia, and National Research University Higher School of Economics, 190008, Saint-Petersburg, Ulitsa Soyuza Pechatnikov 16, Russia; ezhelobodko@gmail.com
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  • Sergey Kokovin,

    1. Novosibirsk State University and Sobolev Institute of Mathematics, 630090, Novosibirsk, Pirogova 2 and 4, Russia, and National Research University Higher School of Economics, 190008, Saint-Petersburg, Ulitsa Soyuza Pechatnikov 16, Russia; skokov7@gmail.com
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  • Mathieu Parenti,

    1. CORE-UCLouvain, 34 Voie du Roman Pays, 1348 Louvain la Neuve, Belgium, Paris School of Economics (Paris 1), 106-112 Bd de l'Hôpital, 75013 Paris, France, and National Research University Higher School of Economics, 190008, Saint-Petersburg, Ulitsa Soyuza Pechatnikov 16, Russia; parenti.mathieu@gmail.com
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  • Jacques-François Thisse

    1. CORE-UCLouvain, 34 Voie du Roman Pays, 1348 Louvain la Neuve, Belgium, National Research University Higher School of Economics, 190008, Saint-Petersburg, Ulitsa Soyuza Pechatnikov 16, Russia, and CEPR; jacques.thisse@ucloubain.be
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    • We are grateful to a co-editor and three referees for their comments and suggestions. We also thank S. Anderson, K. Behrens, M. Couttenier, S. Dhingra, E. Dinopoulos, R. Ericson, R. Feenstra, P. Fleckinger, C. Gaigné, A. Gorn, G. Grossman, J. Hamilton, E. Helpman, T. Holmes, J. Martin, F. Mayneris, G. Mion, J. Morrow, P. Neary, G. Ottaviano, P. Picard, V. Polterovich, R. Romano, O. Shepotilo, O. Skiba, D. Tarr, M. Turner, X. Vives, S. Weber, D. Weinstein, and H. Yildirim for helpful discussions and remarks. We gratefully acknowledge the financial support from the Russian Federation under Grant 11.G34.31.0059 and the Economics Education and Research Consortium (EERC) under Grant 08-036.


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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