Antitrust & Competition Policy Blog

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

Friday, May 9, 2014

Monopolistic competition and income dispersion

OSHARIN, Alexander (NRU-Higher School of Economics, Russia), THISSE, Jacques-Fran├žois (Universite catholique de Louvain, CORE, Belgium), USHCHEV, Philip (NRU-Higher School of Economics, Russia), and VERBUS, Valery (NRU-Higher School of Economics, Russia) describe Monopolistic competition and income dispersion.

ABSTRACT: We develop a model of monopolistic competition that accounts for consumers' heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers' tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.

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