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Monopolistic Competition and Quality Innovation with Variable Demand Elasticity

Author

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  • Gilad Sorek

Abstract

I study product-quality innovation under monopolistic competition with variable demand elasticity preferences and variable marginal cost. I characterize the free-entry equilibrium and the market size effect on product quality and markups. I then compare these results with the ones obtained in related studies of markets with process innovation and show that the market size effect on equilibrium markups depends on innovation type. Lastly, I show that the normative properties of the market equilibrium depend solely on the preferences characteristics, as in the canonical monopolistic competition framework with no innovation.

Suggested Citation

  • Gilad Sorek, 2024. "Monopolistic Competition and Quality Innovation with Variable Demand Elasticity," Auburn Economics Working Paper Series auwp2024-05, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2024-05
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    File URL: https://cla.auburn.edu/econwp/Archives/2024/2024-05.pdf
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    References listed on IDEAS

    as
    1. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    2. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    3. Paolo Bertoletti & Federico Etro, 2021. "Monopolistic competition with generalized additively separable preferences," Oxford Economic Papers, Oxford University Press, vol. 73(2), pages 927-952.
    4. Fan, Haichao & Li, Yao Amber & Xu, Sichuang & Yeaple, Stephen R., 2020. "Quality, variable markups, and welfare: A quantitative general equilibrium analysis of export prices," Journal of International Economics, Elsevier, vol. 125(C).
    5. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques‐François Thisse, 2012. "Monopolistic Competition: Beyond the Constant Elasticity of Substitution," Econometrica, Econometric Society, vol. 80(6), pages 2765-2784, November.
    6. Paolo Bertoletti & Federico Etro, 2016. "Preferences, entry, and market structure," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 792-821, November.
    7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Quality Innovation; Variable Demand Elasticity; Monopolistic Competition;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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