Preferences and income effects in monopolistic competition models

This paper develops a novel approach to modeling preferences in monopolistic competition models with a continuum of goods. In contrast to the commonly used CES preferences, which do not capture the e¤ects of consumer income and the intensity of competition on equilibrium prices, the present preferences can capture both e¤ects. The relationship between consumers’ incomes and product prices is then analyzed for two cases: with and without income heterogeneity. Keywords: product prices; intensity of competition; income distribution. JEL classi…cation: D4 An earlier version of the paper was circulated under the title "Consumer Preferences in Monopolistic Competition Models". I would like to thank Maxim Ivanov, Kala Krishna, Sergey Lychagin, Andrés Rodríguez-Clare, and Michael Seitz for helpful comments and discussion. All remaining errors are mine. ySeminar for International Economics, Department of Economics, University of Munich, Ludwigstr. 28, 80539, Munich, Germany. E-mail: [email protected].