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A Simple Extension to the Dixit-Stiglitz Framework to Allow for Strategic Interaction

Author

Listed:
  • Niroth Chhy

    (Graduate School of Economics, Kobe University)

Abstract

This paper considers a simple extension to the Dixit-Stiglitz framework to allow for strategic interaction. We show that the markup under Bertrand competition is strictly lower than that under Cournot competition and is strictly higher than that under monopolistic competition. We also show that there are two opposing forces: the love for variety and price distortion. Under monopolistic competition, these forces offset one another, and the equilibrium is the second-best optimum. Under oligopolistic competition, price distortion dominates and, because of a lower markup, the social welfare under Bertrand competition is strictly higher than that under Cournot competition.

Suggested Citation

  • Niroth Chhy, 2018. "A Simple Extension to the Dixit-Stiglitz Framework to Allow for Strategic Interaction," Economics Bulletin, AccessEcon, vol. 38(2), pages 1187-1197.
    • Handle: RePEc:ebl:ecbull:eb-18-00173
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    References listed on IDEAS

    as
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    Cited by:

    1. Kenji Fujiwara, 2022. "Cournot, Bertrand or Chamberlin: Market Structures and the Home Market Effect," Discussion Paper Series 235, School of Economics, Kwansei Gakuin University.
    2. Fujiwara, Kenji, 2023. "Market structure and industry location in a footloose capital model," Research in Economics, Elsevier, vol. 77(2), pages 275-283.

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    More about this item

    Keywords

    Monopolistic competition; strategic interaction; Cournot competition; Bertrand competition;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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