2005•MetroeconomicaRequires access

A MODEL OF MONOPOLISTIC COMPETITION WITH PERSONAL INCOME DISPERSION

Corrado Benassi, Alessandra Chirco, Caterina Colombo

Abstract

We introduce non-homothetic preferences in the Dixit–Stiglitz model of monopolistic competition, and enquire about the effects of a change in income dispersion on the firms’ optimal decisions and market equilibrium. Income dispersion, modeled as a mean preserving spread, is shown to affect only the degree of product differentiation under the standard negligibility hypothesis on the firms’ decision making process, while it generates a positive co-movement of demand and demand elasticity, when this assumption is removed and the price index effect is taken into account.

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Key concepts: Monopolistic competition, Economics, Microeconomics, Price dispersion, Homothetic transformation, Dispersion (optics), Income elasticity of demand, Competition (biology)