On the Dixit-Stiglitz Model of Monopolistic Competition

The basic model presented has been used from the start by Dixit and Stiglitz (1977) to study optimum product diversity. It is a simple general equilibrium model with n monopolistic goods and a numeraire good, which can be interpreted as labor time or as the aggregation of all the other goods in the...

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Bibliographic Details
Published in:The American economic review 1996-06, Vol.86 (3), p.623-629
Main Authors: Aspremont, Claude d', Ferreira, Rodolphe Dos Santos, Gérard-Varet, Louis-André
Format: Article
Language:English
Subjects:
Approximation
Commodities
Cost functions
Demand
Economic models
Economic theory
Elasticity of demand
Endowments
Macroeconomic modeling
Monopolistic competition
Price indices
Product mixes
Productivity
Studies
Utility functions
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Summary:The basic model presented has been used from the start by Dixit and Stiglitz (1977) to study optimum product diversity. It is a simple general equilibrium model with n monopolistic goods and a numeraire good, which can be interpreted as labor time or as the aggregation of all the other goods in the economy. A variant of the model is presented, which is an enlarged model, that includes an additional good, interpreted as labor time but not taken as the numeraire. More importantly, the enlarged model does not lead to a general equilibrium analysis until the wage rate is adjusted competitively or strategically. It is shown that, in the enlarged model, taking into account the income-feedback effect allows for an explicit solution and simplifies calculations.
ISSN:0002-8282
1944-7981