Chapter 21 a Macroeconomic Model of Monopolistic Competition: the Dixit-stiglitz Framework

In perfect competition, there is a sense in which no supplier makes any purposeful, meaningful decision regarding the price that it sets. Rather, because of perfect substitutability between all products (recall the assumption of homogenous goods in a perfectly-competitive market), firms are all price-takers. A view of firms as price-takers is incompatible with the notion that we would now like to entertain, that of firms only infrequently setting their prices. Thus, the most basic step we must take in order to even begin to conceptually understand the idea of (possibly sticky) price-setting is to assert that firms are indeed price-setters, rather than pure price-takers.