On the effects of income heterogeneity in monopolistically competitive markets

Income inequality; Monopolistic competition; Nonhomothetic additive preferences; Pricing-to-markets; Trade; Welfare; Finance; Economics and Econometrics

Abstract :

[en] This paper studies the market and welfare effects of income heterogeneity in monopolistically competitive product markets in the context of nonhomothetic preferences. In a closed economy, where richer individuals' expenditures are less sensitive to price change compared to poorer ones', a mean-preserving contraction of income distribution entices firms to charge higher markups, reduce output, and fosters creation of new varieties. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on the whole population. In an open economy with free trade, lower income inequality in one country creates price divergence between trading countries. Lower inequality not only further decreases trade volumes and values but also creates a general equilibrium effect that may negatively affect poor individuals. Finally, general equilibrium effects are shown to be quantitatively nonnegligible.

Disciplines :

International economics

Author, co-author :

Kichko, Sergei; Department of Economics and Management, University of Trento, Trento, Italy

PICARD, Pierre M ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM) ; LIDAM/CORE, Université catholique de Louvain, Louvain-la-Neuve, Belgium

External co-authors :

yes

Language :

English

Title :

On the effects of income heterogeneity in monopolistically competitive markets

Publication date :

01 July 2023

Journal title :

Journal of International Economics

ISSN :

0022-1996

eISSN :

1873-0353

Publisher :

Elsevier B.V.

Volume :

143

Pages :

103759

Peer reviewed :

Peer Reviewed verified by ORBi

Additional URL :

https://api.elsevier.com/content/article/PII:S0022199623000454?httpAccept=text/xml

Funders :

Fonds National de la Recherche Luxembourg

Funding text :

We are very grateful to co-editor Jonathan Vogel and the two referees for their insightful comments, which have led to significant improvements to our paper. We thank Kristian Behrens, John Morrow, Giordano Mion, Yasusada Murata, Peter Neary, Alexander Tarasov, Josef Zweimüller and participants of the “2018 International Trade and Urban Economics” workshop and 2019 IOSE, 2019 ETSG and 2019 FIW conferences for their helpful comments and suggestions. All remaining errors are our own. This research was funded in part by the Luxembourg National Research Fund (FNR) , grant reference [ C20/SC/14755507 and Inter/Mobility/2021/LE/16527808 ]. For the purpose of open access, the author has applied a Creative Commons Attribution 4.0 International (CCBY4.0) license to any Author Accepted Manuscript version arising from this submission.

Available on ORBilu :

since 30 November 2023

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