Price-Increasing Monopolistic Competition? The Case of IES Preferences

IEFE Working Paper No. 15

18 Pages Posted: 19 Nov 2008 Last revised: 23 Nov 2008

See all articles by Paolo Bertoletti

Paolo Bertoletti

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Eileen Fumagalli

Konkurransetilsynet

Clara Poletti

Bocconi University - IEFE

Date Written: October 1, 2008

Abstract

We introduce a new class of "increasing elasticity of substitution" (IES) preferences to model product differentiation. In a monopolistic competition setting a la Dixit - Stiglitz (1977) we find that, even under constant returns to scale and complete information, a rise in the number of firms can be price-increasing. This result extends to Cournotian competition. Despite the price increase, consumers benefit from a rise in the number of monopolistic competitors because of higher product diversity. Higher prices are therefore associated with higher consumer welfare. Our results suggest a possible explanation to the empirical puzzle posed by the countercyclical movements of price-cost margins following globalisation and market reforms. In addition, they should be of interest for real business cycle literature which investigates the impact of an endogenous market structure.

Keywords: monopolistic competition, endogenous mark up, elasticity of substitution

JEL Classification: D43, D11, L11, L16

Suggested Citation

Bertoletti, Paolo and Fumagalli, Eileen and Poletti, Clara, Price-Increasing Monopolistic Competition? The Case of IES Preferences (October 1, 2008). IEFE Working Paper No. 15, Available at SSRN: https://ssrn.com/abstract=1303537 or http://dx.doi.org/10.2139/ssrn.1303537

Paolo Bertoletti (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Eileen Fumagalli

Konkurransetilsynet ( email )

P.O. Box 439 Sentrum
NO- 5805 Bergen
Norway
+47 55 59 75 33 (Phone)

Clara Poletti

Bocconi University - IEFE ( email )

viale Filippetti, 9
Milan, 20122
Italy

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