A Note on the Existence of the Competitive Equilibrium in Grossman and Shapiro (1984)

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Anthony Creane
Keyword(s):  
Monopolistic Competition ◽  
Competitive Equilibrium ◽  
Differentiated Products ◽  
Informative Advertising ◽  
Seminal Paper ◽  
Economic Studies ◽  
Number Of Firms

Abstract In their seminal paper, Grossman, G. M., and C. Shapiro. 1984. “Informative Advertising with Differentiated Products.” The Review of Economic Studies 51: 63–81 assume that it is not profitable for a firm to deviate to the supercompetitive price of Salop, S. C. 1979. “Monopolistic Competition with outside Goods.” The Bell Journal of Economics 10: 141–56. In this note, it is shown that this assumption is violated if, roughly, each firm reaches less than half of all consumers unless it is a duopoly. This implies that most of the simulations in Grossman, G. M., and C. Shapiro. 1984. “Informative Advertising with Differentiated Products.” The Review of Economic Studies 51: 63–81 are not actually equilibria. More importantly, this implies that for their equilibrium to exist nearly all consumers must receive at least one ad. For example, with just four firms in the market, at least 96% of the consumers must receive at least one ad, and this percentage increases with the number of firms in the market.

PRODUCTION SUBSIDY AS A MACROECONOMIC POLICY IN A STAGNATION ECONOMY

2008 ◽  
Vol 53 (02) ◽  
pp. 317-333 ◽  
Author(s):  
WATARU JOHDO
Keyword(s):  
Steady State ◽  
Utility Function ◽  
Monopolistic Competition ◽  
Full Employment ◽  
Macroeconomic Policy ◽  
Elasticity Of Substitution ◽  
Nominal Wage ◽  
Differentiated Products ◽  
Effective Demand ◽  
Number Of Firms

This paper analyzes the effects of a changing production subsidy in a model with money-in-the-utility function for households, monopolistic competition amongst an endogenously-determined number of firms, and nominal wage sluggishness that can prevent the equilibrium from attaining full employment. Its conclusion is that in a steady state with less than full employment (that is, under stagnation), a larger production subsidy will promote entry and stimulate effective demand provided that the elasticity of substitution among the differentiated products is sufficiently high. This paper is motivated by recent Japanese experiences.

scholarly journals Quality Matters: Monopolistic Competition with Heterogeneous Consumers

2019 ◽  
pp. 152-175
Keyword(s):  
Product Quality ◽  
Monopolistic Competition ◽  
Incentive Compatibility ◽  
Industrial Sector ◽  
Differentiated Products ◽  
Optimal Price ◽  
Demand Functions ◽  
Optimum Price ◽  
Heterogeneous Consumers ◽  
Love Of Variety

The paper builds a two-sector monopolistic competition model featuring multi-product firms and heterogeneous consumers endowed with a Cobb–Douglas utility nesting a generalized CES function. In contrast to the standard CES, the generalized CES function includes both the love of variety and the love for product quality, which makes it possible to distinguish consumers differing in their product quality perception. The industrial sector encompasses firms producing differentiated products of varied quality, targeting a certain type of consumer. In such a case, firms set the price and quality for a particular product so as to maximize their profits, while consumers find the optimum price-quality combination, which may be different for groups of consumers having different preferences. The model allows one to derive the demand functions of heterogeneous consumers for goods of different quality and makes it possible to analyze different strategies of firms in their choice of the optimal price-quality ratio for their products. It also allows the formulation of conditions for screening in the case of incomplete information about the type of consumers. The main difference between the equations for screening in the model of monopolistic competition and the standard screening models in theory of contracts lies in the absence of individual rationality restrictions in the monopolistically competitive setting, where only the incentive compatibility is taken into account for both groups of consumers. As a result, in the absence of additional restrictions on the part of the regulatory authorities, the screening procedure in the monopolistic competition setting leads to a decrease in welfare for less affluent consumers.

scholarly journals The Home-Market Effect and Bilateral Trade Patterns

2004 ◽  
Vol 94 (4) ◽  
pp. 1108-1129 ◽  
Author(s):  
Gordon H Hanson ◽  
Chong Xiang
Keyword(s):  
Monopolistic Competition ◽  
Bilateral Trade ◽  
Home Bias ◽  
Differentiated Products ◽  
Home Market ◽  
Transport Costs ◽  
Trade Patterns ◽  
Market Effect ◽  
Market Effects ◽  
Home Market Effects

We develop a monopolistic-competition model of trade with many industries to examine how home-market effects vary with industry characteristics. Industries with high transport costs and more differentiated products tend to be more concentrated in large countries than industries with low transport costs and less differentiated products. We test this prediction using a difference-in-difference gravity specification that controls for import tariffs, importing-country remoteness, home bias in demand, and the tendency for large countries to export more of all goods. We find strong evidence of home-market effects whose intensity varies across industries in a manner consistent with theory.

Informative Advertising with Differentiated Products

1984 ◽  
Vol 51 (1) ◽  
pp. 63 ◽  
Author(s):  
Gene M. Grossman ◽  
Carl Shapiro
Keyword(s):  
Differentiated Products ◽  
Informative Advertising

scholarly journals Is Industry Size a Carrier for Wage Inequality? A Panel Study Addressing Independent Variables of Inherently Different Sizes across Units

2021 ◽  
Vol 14 (9) ◽  
pp. 436
Author(s):  
Jarle Aarstad ◽  
Olav Andreas Kvitastein
Keyword(s):  
Wage Inequality ◽  
Monopolistic Competition ◽  
Panel Study ◽  
Absolute Number ◽  
Size Increase ◽  
Panel Regression ◽  
Independent Variables ◽  
Small Industries ◽  
Random Change ◽  
Number Of Firms

We address how independent variables of inherently different sizes across units, e.g., small vs. large industries, in panel regression is an advantage interpretively. Analyzing a Norwegian industry panel, we find that wage inequality is a function of industry size, particularly size increase, in an absolute number of firms. A possible reason is that specialized skilled employees negotiate higher wages when there are many legal entities. The findings can also imply that wage inequality is more sensitive to random change, particularly an increase, in large rather than small industries. We conclude that particularly large industries are positive carriers of wage inequality and discuss potential underlying causal mechanisms such as monopolistic competition.

scholarly journals Growth and ideas in a perfectly competitive world: A complement

2021 ◽  
Vol 10 (2) ◽  
pp. 157-163
Author(s):  
Vincent Boitier
Keyword(s):  
Growth Model ◽  
Monopolistic Competition ◽  
Competitive Equilibrium ◽  
Returns To Scale ◽  
Perfect Competition ◽  
Household Economy ◽  
Short Article ◽  
Long Run ◽  
Balanced Growth Path ◽  
The One

In this short article, I build an idea-based growth model with perfect competition in a representative household economy. I obtain significant findings that confirm Boitier (2019). First, a competitive equilibrium, increasing returns to scale, and innovations can be tenable. For that, firms must raise capital from shareholders, and the production function must show decreasing returns to scale in the stock of ideas and in labor. Second, the developed idea-based growth model admits a balanced growth path similar to the one provided in an idea-based growth model with monopolistic competition. Whether innovations are competitive or thrive under monopolistic competition does not constitute an engine-driving long-run growth. Importantly, this reconciles Romer (1990, 2015) with Boldrin and Levine (2008).

General Equilibrium Theories of Spatial Agglomeration

2019 ◽  
Author(s):  
Marcus Berliant ◽  
Ping Wang
Keyword(s):  
General Equilibrium ◽  
Urban Growth ◽  
Monopolistic Competition ◽  
Competitive Equilibrium ◽  
Knowledge Transmission ◽  
Equilibrium Models ◽  
Spatial Agglomeration ◽  
Competition Models ◽  
Long Run ◽  
Game Theoretic

General equilibrium theories of spatial agglomeration are closed models of agent location that explain the formation and growth of cities. There are several types of such theories: conventional Arrow-Debreu competitive equilibrium models and monopolistic competition models, as well as game theoretic models including search and matching setups. Three types of spatial agglomeration forces often come into play: trade, production, and knowledge transmission, under which cities are formed in equilibrium as marketplaces, factory towns, and idea laboratories, respectively. Agglomeration dynamics are linked to urban growth in the long run.

Preempting the Entry of Near Perfect Substitutes

2020 ◽  
Author(s):  
Vilen Lipatov ◽  
Damien Neven ◽  
Georges Siotis
Keyword(s):  
Price Competition ◽  
Generic Version ◽  
Differentiated Products ◽  
Quality Competition ◽  
Pharmaceutical Drug ◽  
Market Shares ◽  
Number Of Firms

Abstract When firms compete on price and quality-enhancing promotion in a market for differentiated products, entry of a nearly perfect substitute to one of such products, for example, a generic version of a pharmaceutical drug, intensifies price competition but softens quality competition. We show that consumers are likely to gain from entry when quality is relatively unimportant for them, when business stealing generated by promotion is substantial, and when products are poor substitutes. We also show that entry may be more attractive for consumers in less concentrated markets, as a smaller number of firms and asymmetric market shares may be associated with higher quality.

Market Size, Technology Choice, and Market Structure

2002 ◽  
Vol 3 (1) ◽  
pp. 25-41 ◽  
Author(s):  
Walter Elberfeld ◽  
Georg Götz
Keyword(s):  
Market Structure ◽  
Large Scale ◽  
Monopolistic Competition ◽  
Product Variety ◽  
Market Size ◽  
Technology Choice ◽  
Structural Effects ◽  
Aggregate Output ◽  
Number Of Firms

Abstract We introduce technology choice into a model of monopolistic competition and analyze the structural effects of changes in market size. A larger market leads to the adoption of a large-scale technology. If a technology switch occurs, the number of firms decreases, and a rationalizing effect arises: individual and aggregate output increases; prices fall. This need not benefit consumers since a technology switch is associated with a decrease in product variety.

Sign in / Sign up

Export Citation Format

Share Document