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When Ricardo Meets Chamberlin: A Simple Dynamic Model Of Monopolistic Competition

Author

Listed:
  • Vera Ivanova

    (National Research University Higher School of Economics)

  • Philip Ushchev

    (National Research University Higher School of Economics)

Abstract

We develop a dynamic model of monopolistic competition which sheds light on how the interplay between the degree of product dierentiation and intertemporal elasticity of substitution aects the steady-state equilibrium. Consumers love variety and split their labor endowment between wage labor, which brings immediate income, and producing capital, which yields a rent in the future. The impact of the elasticity of substitution across varieties on the market outcome depends crucially on whether consumption today and consumption tomorrow are gross substitutes or gross complements. The case of Cobb-Douglas intertemporal utility is a borderline situation, when the market outcome is invariant to the degree of product dierentiation. We also fully characterize the unique steady-state equilibrium path and show that the key dynamic properties of the model, such as local stability and determinacy of equilibrium, also hinge mainly on the interplay between the intra- and intertemporal elasticities of substitution.

Suggested Citation

  • Vera Ivanova & Philip Ushchev, 2015. "When Ricardo Meets Chamberlin: A Simple Dynamic Model Of Monopolistic Competition," HSE Working papers WP BRP 99/EC/2015, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:99/ec/2015
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    References listed on IDEAS

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    More about this item

    Keywords

    intertemporal choice; intertemporal elasticity of substitution; love for variety; product dierentiation; toughness of competition; overlapping generations; capital; structural instability.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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