Preferences and income effects in monopolistic competition models

This paper develops a novel approach to modeling preferences in monopolistic competition models with a continuum of goods. In contrast to the commonly used constant elasticity of substitution preferences, which do not capture the effects of consumer income and the intensity of competition on equilibrium prices, the present preferences can capture both effects. The relationship between consumers’ incomes and product prices is then analyzed for two cases: with and without income heterogeneity.

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