Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-24T09:29:29.261Z Has data issue: false hasContentIssue false
  • English
  • Français

TASTE FOR VARIETY AND ENDOGENOUS FLUCTUATIONS IN A MONOPOLISTIC COMPETITION MODEL

Published online by Cambridge University Press:  01 September 2008

Thomas Seegmuller
Thomas Seegmuller*
Affiliation:
Paris School of Economics
*
Address correspondence to: Thomas Seegmuller, CNRS and University Paris 1, Paris School of Economics, Centre d'Economie de la Sorbonne, 106-112 Boulevard de l'Hôpital 75647 Paris Cedex 13, France; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

In past years, imperfect competition has been introduced in several dynamic models to show how markup variability, increasing returns (decreasing marginal cost), and monopoly profits affect the occurrence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety as a result of endogenous product diversity. Introducing monopolistic competition [Dixit and Stiglitz (1977), Benassy (1996)] in an overlapping generations model in which consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small, and a not too elastic labor supply. The key mechanism for this result is based on the fact that, because of taste for variety, the aggregate price decreases with the procyclical product diversity, which has a direct influence on the real wage and the real interest rate.

Keywords

Endogenous FluctuationsTaste for VarietyImperfect Competition
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 4 , September 2008 , pp. 561 - 577
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ball, L. and Romer, D. (1991) Sticky prices as coordination failure. American Economic Review 81, 539–552.Google Scholar
Basu, S. and Fernald, J. (1995) Are apparent productive spillovers a figment of specification error? Journal of Monetary Economics 36, 165–188.Google Scholar
Basu, S. and Fernald, J. (1997) Returns to scale in US production: Estimates and implications. Journal of Political Economy 105, 249–283.Google Scholar
Benassy, J.-P. (1996) Taste for variety and optimum production patterns in monopolistic competition. Economics Letters 52, 41–47.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R. E. A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.Google Scholar
Blundell, R. and Macurdy, T. (1999) Labor supply: A review of alternative approaches. In Ashenfelter, O. and Card, D. (eds.), Handbook of Labor Economics, pp. 1559–1695. Amsterdam: North-Holland.Google Scholar
Burnside, C. (1996) Production function regressions, returns to scale, and externalities. Journal of Monetary Economics 37, 177–201.CrossRefGoogle Scholar
Cazzavillan, G. (2001) Indeterminacy and endogenous fluctuations with arbitrarily small externalities. Journal of Economic Theory 101, 133–157.Google Scholar
Cazzavillan, G., Lloyd-Braga, T. and Pintus, P. (1998) Multiple steady states and endogenous fluctuations with increasing returns to scale in production. Journal of Economic Theory 80, 60–107.Google Scholar
Cook, D. (2001) Time to enter and business cycles. Journal of Economic Dynamics and Control 25, 1241–1261.Google Scholar
Dixit, A. and Stiglitz, J. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67, 297–308.Google Scholar
Dos Santos Ferreira, R., and Lloyd-Braga, T. (2002) Can market power sustain endogenous growth in overlapping-generations economies? Economic Theory 20, 199–205.Google Scholar
Dos Santos Ferreira, R., and Lloyd-Braga, T. (2005) Nonlinear endogenous fluctuations with free entry and variable markups. Journal of Economic Dynamics and Control 29, 849–871.Google Scholar
Duffy, J. and Papageorgiou, C. (2000) A cross-country empirical investigation of the aggregate production function specification. Journal of Economic Growth 5, 87–120.Google Scholar
Gali, J. (1994) Monopolistic competition, business cycles, and the composition of aggregate demand. Journal of Economic Theory 63, 73–96.Google Scholar
Grandmont, J.-M. (1988) Nonlinear Difference Equations, Bifurcation and Chaos: An Introduction. Working paper 8811, CEPREMAP.Google Scholar
Grandmont, J.-M., Pintus, P. and de Vilder, R. (1998) Capital-labour substitution and competitive nonlinear endogenous business cycles. Journal of Economic Theory 80, 14–59.CrossRefGoogle Scholar
Guesnerie, R. and Woodford, M. (1992) Endogenous fluctuations. In Laffont, J.-J. (ed.), Advances in Economic Theory: Proceedings of the 6th World Congress of the Econometric Society, pp. 289–412, Cambridge, MA: Cambridge University Press.Google Scholar
Jacobsen, H. J. (1998) Endogenous Product Diversity and Endogenous Business Cycles. Discussion paper 98–15, University of Copenhagen.Google Scholar
Jacobsen, H. J. (2000) Endogenous, imperfectly competitive business cycles. European Economic Review 44, 305–336.Google Scholar
Killingsworth, M. and Heckman, J. (1986) Female labor supply: A survey. In Ashenfelter, O. and Layard, R. (eds.), Handbook of Labor Economics, pp. 103–204. Amsterdam: North-Holland.CrossRefGoogle Scholar
Kiyotaki, N. (1988) Multiple expectational equilibria under monopolistic competition. Quaterly Journal of Economics 103, 695–714.CrossRefGoogle Scholar
Lloyd-Braga, T. (1995) Increasing Returns to Scale and Endogenous Fluctuations. Working paper 65/95, Universidade Católica Portuguesa.Google Scholar
Lloyd-Braga, T., Nourry, C. and Venditti, A. (2007) Indeterminacy in dynamic models: When Diamond meets Ramsey. Journal of Economic Theory 134, 513–536.CrossRefGoogle Scholar
Nourry, C. and Venditti, A. (2006) The OLG Model with endogenous labor supply: A general formulation. Journal of Optimization Theory and Applications 128, 355–377.Google Scholar
Pencavel, J. (1986) Labor supply of men: A survey. In Ashenfelter, O. and Layard, R. (eds.), Handbook of Labor Economics, pp. 3–102. Amsterdam: North-Holland.CrossRefGoogle Scholar
Reichlin, P. (1986) Equilibrium cycles in an overlapping generations economy with production. Journal of Economic Theory 40, 89–103.CrossRefGoogle Scholar
Rivard, B. (1994) Monopolistic competition, increasing returns, and self-fulfilling prophecies. Journal of Economic Theory 62, 346–362.Google Scholar
Seegmuller, T. (2004) Capital-Labour Substitution and Endogenous Fluctuations: A Monopolistic Competition Approach with Variable Mark-Up. Mimeo, University Paris 1.Google Scholar
Seegmuller, T. (2005) On the stabilizing virtues of imperfect competition. International Journal of Economic Theory 1, 313–323.Google Scholar
Weder, M. (2000) Animal spirits, technology shocks and the business cycle. Journal of Economic Dynamics and Control 24, 273–295.CrossRefGoogle Scholar
Wiggins, S. (1990) Introduction to Applied Nonlinear Dynamical Systems and Chaos. New York: Springer-Verlag.Google Scholar