When Ricardo Meets Chamberlin: A Simple Dynamic Model of Monopolistic Competition

26 Pages Posted: 1 Nov 2015

See all articles by Vera Ivanova

Vera Ivanova

National Research University Higher School of Economics

Philip Ushchev

HSE University

Date Written: October 7, 2015

Abstract

We develop a dynamic model of monopolistic competition which sheds light on how the interplay between the degree of product differentiation and intertemporal elasticity of substitution affects the steady-state equilibrium. Consumers love variety and split their labor endowment between wage labor, which brings immediate income, and producing capital, which yields a rent in the future. The impact of the elasticity of substitution across varieties on the market outcome depends crucially on whether consumption today and consumption tomorrow are gross substitutes or gross complements. The case of Cobb-Douglas intertemporal utility is a borderline situation, when the market outcome is invariant to the degree of product differentiation. We also fully characterize the unique steady-state equilibrium path and show that the key dynamic properties of the model, such as local stability and determinacy of equilibrium, also hinge mainly on the interplay between the intra- and intertemporal elasticities of substitution.

Keywords: intertemporal choice, intertemporal elasticity of substitution, love for variety, product differentiation, toughness of competition, overlapping generations, capital, structural instability.

JEL Classification: D43, D90, D91, L13.

Suggested Citation

Ivanova, Vera and Ushchev, Philip, When Ricardo Meets Chamberlin: A Simple Dynamic Model of Monopolistic Competition (October 7, 2015). Higher School of Economics Research Paper No. WP BRP 99/EC/2015, Available at SSRN: https://ssrn.com/abstract=2683989 or http://dx.doi.org/10.2139/ssrn.2683989

Vera Ivanova

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Philip Ushchev (Contact Author)

HSE University ( email )

3a Kantemirovskaya St, room 405
123 Griboedov Canal Embankment, room 123
Saint-Petersburg, Saint Petersburg 191119
Russia

HOME PAGE: http://https://sites.google.com/site/philipushchev/

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