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Heterogeneous consumers and market structure in a monopolistically competitive setting

Author

Listed:
  • Osharin Alexander
  • Verbus Valery
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.

Suggested Citation

  • Osharin Alexander & Verbus Valery, 2015. "Heterogeneous consumers and market structure in a monopolistically competitive setting," EERC Working Paper Series 15/03e, EERC Research Network, Russia and CIS.
    • Handle: RePEc:eer:wpalle:15/03e
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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