Monopolistic Competition, As You Like It

Abstract

We study imperfect and monopolistic competition with asymmetric preferences over a variety of goods provided by heterogeneous firms. We show how to compute equilibria through the Morishima elasticities of substitution. Simple pricing rules and closed-form solutions emerge under monopolistic competition when demands depend on common aggregators. This is the case for Generalized Additively Separable preferences (encompassing additive preferences and their Gorman-Pollak extensions), implicitly additive preferences and others. For applications to trade, with markups variable across goods of different quality, and to macroeconomics, with markups depending on aggregate variables, we propose specifications of indirectly additive, self-dual addilog and implicit CES preferences.

Keywords: Imperfect Competition, Monopolistic Competition, Asymmetric Preferences, Heterogeneous Firms

JEL Classification: D11, D43, L11