Monopolistic Competition: A Dual Approach

We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms’ size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms’ size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry. We are grateful to Paolo Epifani and Kresimir Zigic for insightful comments on an early version of the paper. Correspondence. Paolo Bertoletti: Dept. of Economics and Management, University of Pavia, Via San Felice, 5, I-27100 Pavia, Italy. Tel: +39 0382 986202, email: [email protected]. Federico Etro: Dept. of Economics, University of Venice Ca’ Foscari, Sestiere Cannaregio, 30121, Fond.ta S.Giobbe 873, Venice, Italy. Tel: +39-0412349172, email: [email protected].