A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers

47 Pages Posted: 12 Feb 2020

See all articles by Sergey G. Kokovin

Sergey G. Kokovin

Novosibirsk State University - Department of Economics

Shamil Sharapudinov

National Research University Higher School of Economics

Alexander Tarasov

National Research University Higher School of Economics

Philip Ushchev

HSE Moscow

Date Written: 2020

Abstract

Our novel approach to modeling monopolistic competition with heterogeneous consumers involves a space of characteristics of a differentiated good (consumers' ideal points), alike Hotelling (1929). Firms have heterogeneous costs à  la Melitz (2003). In addition to price setting, each firm also chooses its optimal location/niche in this space. We formulate conditions for positive sorting: more efficient firms serve larger market segments and face tougher competition in the equilibrium. Our framework entails rich equilibrium patterns displaying non-monotonic markups, high in the most and least populated niches, and the unequal gains from trade across different consumers.

Keywords: firm heterogeneity, product space, positive sorting, product niches

JEL Classification: F100, L110, L130

Suggested Citation

Kokovin, Sergey G. and Sharapudinov, Shamil and Tarasov, Alexander and Ushchev, Philip, A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers (2020). CESifo Working Paper No. 8082, Available at SSRN: https://ssrn.com/abstract=3536727 or http://dx.doi.org/10.2139/ssrn.3536727

Sergey G. Kokovin (Contact Author)

Novosibirsk State University - Department of Economics ( email )

2 Pirogova Street
Novosibirsk 630090
Russia

Shamil Sharapudinov

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Alexander Tarasov

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Philip Ushchev

HSE Moscow ( email )

26 Shabolovka
Moscow
Russia

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