Abstract:

We propose a general model of monopolistic competition with endogenous mark-ups, which encompasses existing models while being flexible enough to take into account new demand and competition features. Using the concept of Frechet differentiability, we determine a general demand system. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which is shown to depend only upon the per capita consumption and the total number of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. We provide necessary and sufficient conditions under which the market generates pro-competitive effects. Finally, we discuss the optimality of the equilibrium and show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers.