Abstract
The paper investigates distributional effects and market structure in a one-sector model of monopolistic competition with heterogeneous consumers. By using the CES utility function depending on consumer's personal income the paper shows how the equilibrium prices, firm size and number of firms depend upon income distribution and intensity of competition. The proposed model extends the traditional Dixit-Stiglitz approach and has a wider range of applications.
Highlights
The question of consumer’s preferences impact on market structure and international trade is one of the urgent and widely discussed in the contemporary literature
The paper develops the model of monopolistic competition with heterogeneous consumers by using the modified CES utility function depending on consumer’s personal income
In contrast to the commonly used CES preferences, which do not capture the effects of consumer income distribution and intensity of competition on market structure, the present model captures both of these effects
Summary
The question of consumer’s preferences impact on market structure and international trade is one of the urgent and widely discussed in the contemporary literature. An aggregate demand is supposed to depend only upon commodity prices and aggregate income and doesn’t depend on the income distribution. Such assumptions are used due to analytical convenience and tractability. They sufficiently simplify calculations, but have a lot of shortcomings, empirically implausible, and vigorously discussed in the literature [4,5,6]
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