Heterogeneous consumers and market structure in a monopolistically competitive setting

Tuesday, January 12, 2016

Heterogeneous consumers and market structure in a monopolistically competitive setting

Osharin Alexander and Verbus Valery examineHeterogeneous consumers and market structure in a monopolistically competitive setting.

ABSTRACT:The present paper extends the traditional Dixit and Stiglitz set-up by introducing consumers/workers heterogeneity into a general equilibrium model of monopolistic competition. The model obtains a closed-form solution for a symmetric equilibrium and shows how the market outcome depends on the joint distribution of consumers/workers taste and labor productivities. In contrast to the traditional framework, our model predicts that the short-run equilibrium price may vary with the number of firms, demonstrating both anti- and pro-competitive behavior, which is in accordance with economic intuition and empirical evidence. Proposed approach is also capable to explain variability of the long-run equilibrium markups, which is observed empirically. Unlike the standard CES model, where markups are constant, in our setting the equilibrium markups depend on the covariance of tastes and productivity.

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