Econometrica: Nov 2012, Volume 80, Issue 6

Monopolistic Competition: Beyond the Constant Elasticity of Substitution

DOI: 10.3982/ECTA9986
p. 2765-2784

Evgeny Zhelobodko, Sergey Kokovin, Mathieu Parenti, Jacques‐François Thisse

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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Supplemental Material

Supplement to "Monopolistic Competition: Beyond the CES"

In this appendix, we prove the various statements made in our paper.  In Appendix A, we study the impact of market size on the FEE. Appendix B is devoted to the multi-sector economy, while Appendix C shows that the equilibrium under the translog behaves like the equilibrium under the CARA.

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