Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Monday, April 18, 2011

Monopolistic competition in general equilibrium: Beyond the CES

Posted by D. Daniel Sokol

Evgeny Zhelobodko (NSU - Novosibirsk State University - Novosibirsk State University), Sergey Kokovin (NSU - Novosibirsk State University - Novosibirsk State University, Sobolev Institute of Mathematics - Russian Academy of Science), Mathieu Parenti (Université Panthéon Sorbonne - Paris 1 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris), Jacques-François Thisse (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris discuss Monopolistic competition in general equilibrium: Beyond the CES.

ABSTRACT: We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.

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