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.
Monopolistic Competition: Beyond the Constant Elasticity of Substitution
Article first published online: 26 NOV 2012
© 2012 The Econometric Society
Volume 80, Issue 6, pages 2765–2784, November 2012
How to Cite
Zhelobodko, E., Kokovin, S., Parenti, M. and Thisse, J.-F. (2012), Monopolistic Competition: Beyond the Constant Elasticity of Substitution. Econometrica, 80: 2765–2784. doi: 10.3982/ECTA9986
- Issue published online: 26 NOV 2012
- Article first published online: 26 NOV 2012
- Manuscript received April, 2011; final revision received March, 2012.
- Monopolistic competition;
- additive preferences;
- love for variety;
- heterogeneous firms
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.