Dixit-Stiglitz-Krugman Model with Nonlinear Costs

Abstract

We study the market equilibrium in international trade monopolistic competition model a‘la Dixit-Stiglitz-Krugman with homogeneous firms. The utility of consumers are additive separable. Transport costs are of “iceberg type.” The only production factor is labor. The concrete functional form of sub-utility function is assumed unknown. Thus, it is not possible to get the equilibrium in closed form. We examine the local symmetric comparative statics of consumption, prices, firms masses and firms sizes with respect to transport costs. For linear production costs, the results about equilibria near free trade and autarky are known. We show that many of these results are true for the case of non-linear production costs.