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Monopolistic Competition in Two-Sector Economy under Demand Uncertainty

Author

Listed:
  • Alexander Borisovich Shapoval

    (Financial University under the Government of the Russian Federation NES CSDSINRU HSE)

  • Vasiliy Mikhailovich Goncharenko

    (Financial University under the Government of the Russian Federation)

Abstract

The article deals with the theory of monopolistic competition under demand uncertainty. The authors consider the economy with labor immobility consisting of the high-tech sector with monopolistic competition and the standard sector with perfect competition. Preferences between sectors are specified by the Cobb - Douglas production function. It is assumed that companies make output decisions under preferences uncertainty and consumers’ distribution by sectors will be known by the time of realization. It means that firms are informed about consumer demand with accuracy up to a multiplicative uncertainty which is generated by random parameters in the Cobb - Douglas production function. The paper shows that demand uncertainty leads to consistent growth of prices and wages in high-tech sector in relation to salaries in the second sector. The impact of uncertainty on welfare is ambiguous. In particular, under the known expected value of uncertainty customers derive benefit from exaggerated companies’ expectations about clients’ desire to consume high-tech goods.

Suggested Citation

  • Alexander Borisovich Shapoval & Vasiliy Mikhailovich Goncharenko, 2014. "Monopolistic Competition in Two-Sector Economy under Demand Uncertainty," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 3, pages 12-25.
    • Handle: RePEc:far:spaeco:y:2014:i:3:p:12-25
    DOI: 10.14530/se.2014.3.12-25
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    Cited by:

    1. Pokrovsky, D. & Shapoval, A., 2015. "Distribution of Entrepreneurial Skills and Migration: Employment Structure, Income Inequality, and Welfare," Journal of the New Economic Association, New Economic Association, vol. 26(2), pages 36-62.

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