General Equilibrium Models of Monopolistic Competition: CRRA Versus Cara

CORE Discussion Paper No. 2005/33

15 Pages Posted: 15 Nov 2005

See all articles by Kristian Behrens

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Yasusada Murata

Nihon University - Advanced Research Institute for the Sciences and Humanities

Date Written: April 2005

Abstract

We analyze a class of 'large group' Chamberlinian monopolistic competition models using multiplicatively quasi-separable (MQS) and additively quasi-separable (AQS) functions. We first prove that the MQS and AQS functions are equivalent to the 'constant relative risk aversion' (CRRA) and 'constant absolute risk aversion' (CARA) classes of functions, respectively. Whereas both approaches allow for closed-form solutions, only the AQS functions yield profit-maximizing prices that decrease in the mass of competing firms. We then characterize the equilibrium in both cases and discuss some possible applications of the AQS framework to trade, growth, and development.

Keywords: monopolistic competition, general equilibrium, price equilibrium,additive quasi-separability, multiplicative quasi-separability

JEL Classification: D43, D50, L13, L16

Suggested Citation

Behrens, Kristian and Murata, Yasusada, General Equilibrium Models of Monopolistic Competition: CRRA Versus Cara (April 2005). CORE Discussion Paper No. 2005/33. Available at SSRN: https://ssrn.com/abstract=847724 or http://dx.doi.org/10.2139/ssrn.847724

Kristian Behrens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.core.ucl.ac.be:16080/~behrens/

Université de Bourgogne - LATEC

Pôle d'Economie et de Gestion
21066 Dijon Cedex
France

Yasusada Murata

Nihon University - Advanced Research Institute for the Sciences and Humanities ( email )

Tokyo
Japan

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