Monopolistic Competition, As You Like It

Abstract

We study monopolistic competition with asymmetric preferences over a variety of goods provided by heterogeneous firms and show how to compute equilibria (which approximate Cournot and Bertrand equilibria when market shares are negligible) through the Morishima measures of substitution. Further results concerning pricing and entry emerge under homotheticity and when demands depend on a common aggregator, as with GAS preferences. Under additivity, we can determine which goods are going to be provided under free entry, and the selection effects associated with changes in market size (i.e. opening up markets), consumers' income (i.e. demand shocks), aggregate productivity (i.e. supply shocks or technological growth) and preference parameters.

Keywords: Monopolistic competition, Asymmetric preferences, Heterogeneous firms, Generalized separability, Variable markups

JEL Classification: D11, D43, L11