Endogenous technology models with expanding varieties 1 2 dixitstiglitz framework based on, avinash dixit and joseph stiglitz, monopolistic competition and optimal product diversity, aer 1977. Economics students are generally well trained in perfectly competitive markets. Krugman 1979 and in feenstra 2004 a similar model to the one above is used, but with a more general utility function. In the dixit stiglitz model there are made two important assumptions. Dixitstiglitz constantelasticityofsubstitution dsces function, feenstra shows how to use trade data in order to estimate the elasticity of substitution among the different varieties of a given product for a given importing country2. One starts with the assumption that the number of competitors is infinite, so adding in more competitors has no effect. The dixitstiglitz economy with a small group of firms. Mobile capital, variable elasticity of substitution, and.
Constant elasticity of substitution ces, in economics, is a property of some production functions and utility functions. This chapter is also related to the literature on international interdependency in. The dixit stiglitz demand system and monpolistic competition. Heterogeneous productivity shocks, elasticity of substitution. This is unusual since in most forms of imperfect competition, the optimal pricemarginal cost markup depends. Substitutability and competition in the dixitstiglitz model winfried koeniger and omar licandro badia fiesolana, san domenico fi. Zhelobodko, kokovin, parenti and thisse forthcoming. Model consider the following partial equilibrium model of an i ndustry.
We have considered in our paper constant elasticity of substitution. Starting with the constant elasticity of substitution utility function which underlies the spencedixitstiglitz henceforth sds framework, we compute an exact aggregate price index for the ces utility function that allows for changes in varieties. On the dixitstiglitz model of monopolistic competition claude daspremont, rodolphe dos santos ferreira, and louisandr e g erardvarety our purpose in this note is to revisit the popular monopolisticcompetition model of avinash k. The purpose of this note is to show you how it can be derived and its contribution to dixitstiglitz formulation. The dixit stiglitz monopolistic competition model has been widely adopted in various elds of economic research such as international trade. Therefore also the demand elasticity depends on substation. That is, in the symmetric case, the same markup formula can be applied to monopolistic competition. For the seminal issue of the degree of goods price stickiness, it is goods markets on which we need to.
Ces model this assignment will take you about 2 hours. Notes on dixitstiglitz size distribution model econ 8601 1. Consider the monopolistic competition model with ces utility developed by dixit and stiglitz aer, 1977. Develop an equilibrium framework that features love for variety i. Such markets are often thought to be characterized by well defined utility functions and homogenous production functions with constant and decreasing marginal productivities. We use a dixitstiglitz setting to show that aggregate productivity. A note on ces functions drago bergholt, bi norwegian business school 2011 functions featuring constant elasticity of substitution ces are widely used in applied economics and. Monopolistic competition and optimum product diversity. Constant elasticity of substitution ces preferences are at heart of the dixitstiglitz monopolistic competition model dixit and stiglitz, 1977. Keywordsdixitstiglitziceberg framework, elasticity,echelon migration, tradeoff i. Heterogeneous productivity shocks, elasticity of substitution and aggregate fluctuations alessio moro y rodolfo stucchi z march 14, 2015 abstract we use a dixitstiglitz setting to show that aggregate productivity uctuations can be generated through changes in the dispersion of rms productivity. In this note, we point out some limitations of this approach. Each monopolist ignores the crossprice elasticity of demand for a given variety of goods.
In that case, the elasticity of substitution depends on the consumption of each good. In a competitive market, it measures the percentage change in the ratio of two inputs used in response to a percentage change in their prices. Elasticity of substitution is the elasticity of the ratio of two inputs to a production or utility function with respect to the ratio of their marginal products or utilities. Dixitstiglitz pricing index economics stack exchange. Constant elasticity of substitution ces, in economics, is a property of some production functions and utility functions specifically, it arises in a particular type of aggregator function which combines two or more types of consumption goods, or two or more types of production inputs into an aggregate quantity. Endogenous technology models with expanding varieties 1 2 dixit stiglitz framework based on, avinash dixit and joseph stiglitz, monopolistic competition and optimal product diversity, aer 1977. This is a well known property of dixitstiglitz style models of monopolistic competition and is addressed in the original paper by. The elasticity of substitution is the elasticity of the ratio of two inputs to a production or utility function with respect to the ratio of their marginal products or utilities. Lecture notes on elasticity of substitution ted bergstrom, ucsb economics 210a october 26, 2015 todays featured guest is \the elasticity of substitution. First, i derive a number of conditions such as the optimal demand schedule when aggregation technology is ces. Dixit stiglitz constant elasticity of substitution dsces function, feenstra shows how to use trade data in order to estimate the elasticity of substitution among the different varieties of a given product for a given importing country2. Constant elasticity of substitution ces functions are the most extensively used functional form in economics so far, but textbooks seldom give good and enough illustrations on how to use them. The dixitstiglitz demand system is popular because it provides a tractable means of introducing monopolistic competition and increasing returns. Chapter 21 a macroeconomic model of monopolistic competition.
The dixit and stiglitz 1977 paper actually contains three distinct models, yet economic literature has mostly taken up only the rst one constant elasticity case and its market equilibrium solution. A wellknown property of the standard constant elasticity of substitution ces model of monopolistic competition developed by dixit and stiglitz 1977 is that it displays constant markups regardless of the number of. The main results of this subset of dixit and stiglitz 1977 are derived and explained below in order to aid in understanding this widespread model. The dixitstiglitz demand system and monpolistic competition. Consider the same model in the immediately preceeding question, except assume that preferences are instead given by. Convergence and the welfare gains of capital mobility in a. The dixitstiglitz mode o 1 1 g n p m the relationship between g and n depends on the elasticity of substitution between varieties the lower is the more differentiated are varieties the greater is the reduction in g caused by an increase in the number of varieties. The purpose of this note is to show you how it can be derived and its contribution to dixit stiglitz formulation. It is well known that problems can arise for three broad reasons.
The simplest means of introducing increasing returns is to assume that the production of a good involves a xed cost in addition to a constant marginal cost, so that the average cost is decreasing in quantity. Stiglitz the basic issue concerning production in welfare economics is whether a market solution will yield the socially optimum kinds and quantities of commodities. Substitutability and competition in the dixitstiglitz model. Its propertythat firms profitmaximizing prices display constant markups over marginal costsconsiderably simplifies the calculation and allows us to explore markets of imperfect competition and increasing. Stiglitz 1977 and to stress the fact that the variant of this model used. Stiglitz research in economics 71 2017 798802 799 model through which we understand the stringent conditions required for markets to be e. Lecture notes on elasticity of substitution ted bergstrom, ucsb economics 210a march 3, 2011 todays featured guest is \the elasticity of substitution. Its propertythat firms profitmaximizing prices display constant markups over marginal costsconsiderably simplifies the calculation and allows us to explore markets of imperfect competition and increasing returns in a. This aggregator function exhibits constant elasticity of. The effects of competition on growth are analyzed in the recent literature by comparing economies with the same market structure but different degrees of substitutability. Envelope theorems will be useful in result interpretation.
In these models, the elasticity of substitution between home and foreign produced goodsthe armington elasticity, after armington 1969is the critical. A more general treatment of ces will be given later. The dixitstiglitz demand system, monpolistic competition and trade. The dixitstiglitz framework the rbc view of the macroeconomy is premised on perfect competition in all three macro markets goods markets, labor markets, and financial markets. Results from the dixitstiglitz monopolistic competition model. Feel free to do it with friends i suggest classmates since doing it with other friends may end the relationship. Geopo 232 third, the invariance of the dixitstiglitz markup to changes in the number mass of firms is easily understood. Such markets are often thought to be characterized by well defined utility functions and homogenous production functions with constant and decreasing marginal productivities and constant returns to scale. Introduction ollowing the pioneering work of harris and todaro1, economists have studied the various scenarios of migratory movement, such as the multicountry model described by the dixitstiglitz structure2. Measuring the price elasticity of import demand in the. Product diversity 299 turning to the second stage of the prob lem, it is easy to show that for each i, 7 where y is defined by 4. The dixit stiglitz demand system, monpolistic competition and trade. Monopolistic competition and optimum product diversity under. This is a limit case where all the weight is put on the intrasectoral elasticity of substitution.
A generalised variable elasticity of substitution model of. Despite deviations from pure competition, melitz does not support intervention 2. Its a simple general monopolistic model with n monopolistic goods, and a numeraire good labour. It measures the curvature of an isoquant and thus, the. A remarkable feature of this parameter is that it can also be interpreted, under the maintained. The dixitstiglitz monopolistic competition model has been widely adopted in various elds of economic research such as international trade. Economics stack exchange is a question and answer site for those who study, teach, research and apply economics and econometrics. On the dixitstiglitz model of monopolistic competition. Pdf on the dixitstiglitz model of monopolistic competition. This seems attractive because the elasticity of substitution is negatively related to the markup, a standard measure of competition.
On the dixit stiglitz model of monopolistic competition. Then, coming back to the pricecompetition regime and a ces subutility, we show that one recovers dixitstiglitz equilibrium conditions. Economist dixit stiglitz model demand labour economics. Specifically, it arises in a particular type of aggregate function which combines two or more types of consumption, or two or more types of productive inputs into an aggregate quantity. This is a well known property of dixit stiglitz style models of monopolistic competition and is addressed in the original paper by the authors. Dingely 9 june 2009 this document derives some of the most basic \dixitstiglitz lite equations stepbystep. Following the dixitstiglitz 1977 approach, the elasticities of substitution between different varieties is constant and equal to e 1. Dingely 9 june 2009 this document derives some of the most basic \ dixit stiglitz lite equations stepbystep. Notes on dixitstiglitz size distribution model econ 8601. Classification of the elasticities of substitution and complementarity table 1 provides a taxonomy of the objective and demand functions that can be used to derive elasticities of substitution for both the gross and net substitution cases for the primal and dual problems.