Horizontal Differentiation and Economic Growth under Non–Homotheticity

In the original Romer (1990)’s model, as well as in its numerous subsequent extensions, a homothetic production function of the CES/CRRA type is postulated for the final good sector. The aim of the present paper is to relax this restriction in order to study an extended and more general version of that model. In this regard, we describe the production behavior of the representative firm operating in the final output sector by means of a broader class of symmetric, additively separable production functions, not necessarily homothetic. This approach allows us to unveil the differences between price decreasing and price increasing competition when analyzing the impact of markups on economic growth. Such differences cannot be disclosed under the more traditional hypothesis of CES/CRRA production function.