mon compeer cslides1

Mon-comp details and our EERC grantNew-new market theory

EERC

Monopolistic Competition among Market Theoriesand EERC among Researchers

S.Kokovin

2016

. .

Abstract

Evolution of market theories: Perfect, Oligopolistic, Mon-Comp-1,Mon-Comp-2, Mon-Comp-3, Mon-Comp-4,...

Mon-Comp-1: Dixit-Stigliz, Krugman: homogeneous �rms

Mon-Comp-2: Hoppenhain, Melitz, Asplund-Nocke: heterogeneous�rms, stochastic industry

How EERC helped me and E.Zhelobodko in this research

How EERC established high academic standards in Post-SU


EERC

Outline

1 Mon-comp details and our EERC grant

2 New-new market theory

3 EERC

. .

3 kinds of market theories

(1) Perfectly competitive markets: free entry, inde�nitely many�rms-price-takers with constant or decreasing returns to scale,homogeneous goods (oil, grain?) - A.Smith, D. Ricardo, ...Arrow-Debreu (1957)

(2) Oligopolistic markets: no entry, small �nite given number (1,2, 3,...) of strategic �rms-price-makers, increasing returns,homogeneous or di�erentiated good (telephony and Internet

providers?) - Cournout, Bertrand,... Maskin-Tirole (1988). Spatialtradition: Hotelling (1930), Salop (1976)...

(3) Monopolistically competitive markets: free entry, big de�nitemass of �rms-price-makers, di�erentiated good, decreasing orincreasing returns (almost any real market) - Chamberlin,Dixit-Stiglitz (1987), Melitz (2003), Itshoki-Helpman (2010)...Spatial: Krugman (1990), Fijita (1992)...

(1) and (2) are (sort of) degenerate cases of (3).Market theory is far from being completed....


EERC

4 kinds of phenomena to be explained

Pefect competition theory explains: market self-regulation,comparative statics, gains from trade (e.g., Ricardo, Hecsher-Ohlin)...

Oligopoly theory explains: strategic behavior, motives for cartels,market distortion, harm from market power. Spatial markets:localization of �rms ...

Monopolistically-competitive theory 1: love for variety, distortionfrom insu�cient or excessive competition, innovative growth, mutualtrade, agglomeration in economic geography ...

Monopolistically-competitive theory 2: coexisting weak andstrong �rms, creative destruction, selection e�ects, turnover of�rms...

...

. .

How �new� market theory evolved

Chamberlin (1929): basic idea - incomplete substitution, inrceasingreturns, free entry...

Dixit and Stiglitz (1977): formal model - existence, ine�ciencytheorem, Krugman (1979): - application to trade (space),comparative statics, agglomeration...

Melitz (2003) - heterogeneous �rms, Asplund-Nocke (2006) -stochastic heterogeneous �rms, Itshoki-Helpman (2010) -heterogeneous �rms with heterogeneous labor

=> Flourishing �new� theories: New growth (Aghion, Howitt),New International Trade (Helpman, Krugman), New Ec. geography(Fujita, Krugman, Thisse, Venables, Combes, Mayer) ....

Long-term goals of theory

to explain numerous phenomena

to forecast what will happen after changes like WTO membership,new governmental regulations, technological revolutions, migration...

Generally, market theory is far from being satisfactory, it developesquickly under pressure of new �rm-level data and consumer-level data.CGE will sooner or later bring good forecasts.


EERC

Common hypotheses of any monopolistic competition

1 Di�erentiated good and consumers' love for variety

2 Increasing returns to scale

3 Big number of �rms - price-makers

4 Free entry to the market

There can be homogeneous or heterogeneous �rms, many countries andsectors...

. .


EERC

Basic model: consumers

Facing N varieties, each of L consumers with income I choosesconsumption-vector X ≡ (xi )i∈[0,N] to maximize:

maxX≥0

N

∑0

u(xi ) ;N

∑0

pixi = I or

maxX≥0

∫ N

0

u(xi )di ;∫ N

0

pixidi = I (1)

where P ≡ pi∈[0,N] ≡ p(i)i∈[0,N] ≥ 0 - price vector,u(.) - concave elementary utility, u(0) = 0. Demand for each variety i :

x∗i = u′−1(λpi ) ; p∗i (xi ,λ )≡ u′(xi )/λ , (2)

where λ = λ (P,N) - Lagrange multiplier = intencity of competition.

. .


EERC

Model: producers, equilibrium

Each �rm i takes competition λ parametrically and chosses output/prices:

maxxi≥0

π(xi ,λ )≡ p∗(xi ,λ )Lxi −C (Lxi ) ⇒ π′(xi ,λ ) = 0. (3)

qi ≡ Lxi - output, C (.) - cost function; C (0) = 0.(Symmetric) equilibrium is (x̄ , p̄, λ̄ , N̄) consumption, price, competition,mass of �rms, satisfying free-entry and labor balance:

π(x̄ , λ̄ ) = 0, LE = C (Lx̄) N̄. (4)

. .

Utilities used: power xa (CES), quadratic, CARA

CES-model predicts constant markups, but ��rms operating in biggermarkets have lower markups� (Syverson, 2007).

CES-model predicts constant output, but ��rms tend to be larger inlarger markets� (Campbell and Hopenhayn, 2005).

Two other utilities: quadratic - Ottaviano-Tabuchi-Thisse (2002),CARA - Behrens-Murata (2007) cured shortcomins of CES, but�How can we draw general conclusions... from these models if theconclusions change when the utility functions or functional form oftransport cost change? Certainly, examples are a �rst step in aresearch program. But they are usually not the last.� [: Berliant(2006):]


EERC

EERC grant 2009 Kokovin-Zhelobodko

We have generalized basic Mon-Comp model, simplifying its equations to:

ER(x̄)≡ 1− ru(x̄) = EC (Lx̄), M̄ = |Eu′(x̄)|, N̄ = E L/C (Lx̄)

where Ef (x)≡ xf ·

df (x)dx - is elasticity operator for any f ,

R(x)≡ p∗(xi ,λ )xi - revenue per consumer, M ≡ p̄−C ′(x̄)p̄ - markup, Lx̄ -

output.These simpli�cations allowed to derive general necessary and su�cientconditions on utilities and costs u(.), C (.) for price-increasing(price-decreasing) e�ects of market size (trade) and other comparativstatics e�ects. Publication: Econometrica (2012) Zhelobodko, Kokovin,Parenti, Thisse.EERC was a great help in this research! Gratitude to Richard Ericson,Shlomo Weber, Sasha Skiba and all!

. .


EERC

Shumpeterian stochastic industry

Iovanovich (1982), Hopenhayn (1992), Asplund-Nocke (2006): �rm'sproductivity is stochastic in any period, not only at �rm's birth (as inMelitz-2003)

10 12 14 16 18 20

-0.05

0.05

0.1

Figure: Firms cloud

We see that generalized-Melitz curve Markup(Revenue) is a weak

approximation of what is happening in the industry... Volatility andturnover are important! Area for research, so far.

. .


EERC

2-D heterogeneity: Helpman-Itshoki-Redding 2010

Helpman-Itshoki-Redding (2010) Econometrica: �Inequality andunemployment in a global economy�. = Mainstream theory andestimates.This paper, and numerous subsequent papers, extend Melitz-2003 toheterogeneous labor for heterogeneous �rms and explains: curve ofpro�ts, curve of wages, unemployment - in connection with internationaltrade.Main idea: better �rms select better labor during stochastic search.International trade facilitates this process, which enhance bene�ts forstrong �rms/workers but deteriorates welfare of weak segment.

. .


EERC

2-D consumer heterogeneity

Ottaviano (2016?), Kokovin-Goryunov-Tabuchi (2016?),Kokovin-Tarasov-Sharapudinov (2016?): heterogeneous �rms andheterogeneous consumers

This approach combines Hotelling and Chamberlin: �linear city� ofconsumers' tastes and continuum of �rms choosing theirprices/locations in the space of consumer types. E�ects:

Stronger �rms locate in best sites, weaker �rms locate amongexotic consumers. Stronger �rms export to best sites abroad.

Clusterization: �rms set standards because of competition, notonly because of technology

. .


EERC

Big and small �rms together

Anderson-Erkel-Piccinin (2013) �Aggregate Oligopoly Games with Entry�,Kokovin-Parenti-Thisse (2016?) �Big and small �rms together� -combines few oligopolists and continuum of monopolistically competitive�rms in a di�eerntiated industry.Strategic considerations vanish! Big �rms behave like small, becauseof free entry of small.

. .


EERC

Various demand speci�cations

Bertoletti-Etro (2015) �Dual-additive utility�: consumer'sexpenditure function is assumed additive, instead of directutility. This approach allows good modelling of income e�ects,while usual one is good for market size e�ects.Parenti-Ushev-Thisse �Towards a general theory ofmonopolistic competition� (2016?)....

Good estimation and computable prognostic models areamong new challenges

. .


EERC

EERC was a great help

For dozens of us, economists surviving in Marxian desert of SovietUnion, EERC was always a gulp of water, a fresh air of real scienti�cdiscussion and real expertize

A.Einstein said that �physics develops not from idea to idea but fromgrave to grave�. This is true about economics in FSU. Low standardsof research are reproducing themselves in hundreds of universities.

�New vine for new bottles.� EERC, New Economic School, KievSchool of Economics, Higher School of economics are exceptionsand exceptionally useful!

EERC, NES, KSE, HSE actually produced a new, productivegeneration of economists in FSU

. .

Conclusions

Some achievements of theory are behind, big challengesahead. New data and new ideas are the engine of revolutionarydevelopments in theory.

EERC was always a great source of expertize and supportfor emerging true economic science in Former-Soviet-Union

We express deep gratitude to the EERC team and its greatexperts!

Thank you!!

mon compeer cslides1

Science