Friday, September 29, 2017
Monopolistic Competition When Income Matters.
Paolo Bertoletti, University of Pavia - Department of Political Economy and Quantitative Methods and Federico Etro, Ca Foscari University of Venice have written on Monopolistic Competition When Income Matters.
Abstract: We analyse monopolistic competition when consumers have an indirect utility that is additively separable. This leads to markups depending on income (both in the short and long run) but not on the market size, which generates pricing to market, incomplete pass‐through and pure gains from variety for countries that open up to trade. Firms’ heterogeneity à la Melitz implies a Darwinian effect of consumers’ spending on business creation and a Linderian effect on (endogenous) quality provision. We discuss extensions with an outside good and heterogenous agents, and offer simple and tractable specifications (linear or log‐linear) of the demand functions.