Information and communication technology ict is interpreted as i technical progress in the matching function of the pissarides labour market search model where it is increasing the probability of filling a. In this theory, innovation causes productivity growth by creating new, but not necessarily improved, varieties of products. The dixitstiglitz model of monopolistic competition works. Economics students are generally well trained in perfectly competitive markets. The dixitstiglitz framework the rbc view of the macroeconomy is premised on perfect competition in all three macro markets goods markets, labor markets, and financial markets. Consumers a large number of potential goods enter symmetrically into utility according to the utility function u xn i1 c.
Information and communication technology ict is interpreted as i technical progress in the matching function of the pissarides labour market search model where it is increasing the probability of filling a vacancy, and ii as technical change in the production function of the dixitstiglitz goods market model where it is increasing fixed. We develop a parsimonious model to account for this fact based on the idea that products are made. Meritinfonomics research memorandum series ict as technical. The ds production function allows for closed form solutions and it is helpful in developing our intuitions. Substitutability and competition in the dixit stiglitz model, iza discussion papers 1007, institute of labor economics iza. Constant elasticity of substitution ces, in economics, is a property of some production functions and utility functions. It is important to note that the longrun equilibrium output of each firm is constant. All firms face the standard dixitstiglitz fixed cost of developing a new variety, but selling their variety also. Ces functions and dixitstiglitz formulation yiqian lu. The facts of economic growth handbook of macroeconomics. We have considered in our paper constant elasticity of substitution caseces.
Ces functions and dixitstiglitz formulation weijie chen1 department of political and economic studies university of helsinki 12 september, 2011 0 5 10 5 10 0 10 20 30 40. Solow and romer robert solow 1950s capital versus labor cannot sustain longrun growth paul romer 1990s objects versus ideas sustains longrun growth wideranging implications for intellectual property, antitrust policy, international trade, the limits to growth, sources of catchup growth romers insight. It makes use of the dixitstiglitzethier production function, in which. This is unusual since in most forms of imperfect competition, the. This is unusual since in most forms of imperfect competition, the optimal pricemarginal cost markup depends. Dixitstiglitz model with product variety and zhang s concept of disposable income and utility function.
Country diversification, product ubiquity, and economic. Such markets are often thought to be characterized by well defined utility functions and homogenous production functions with. This is a direct and inevitable implication of the constant markup, free entry and the homothetic cost function. Endogenous technology models with expanding varieties aggregate demand externalities the level of c can now be calculated from eq. There is a mass of consumerworkers of measure one, each of them endowed with one unit of time. Stiglitz the basic issue concerning production in welfare economics is whether a market solution will yield the socially optimum kinds and quantities of commodities. This document derives some of the most basic dixitstiglitz lite equations step bystep. In section 4 we consider the effects of technical change, lowering variable but increasing fixed costs of production. Finally, ethnic diversity may enter the production function. The simplest means of introducing increasing returns is to assume that the production of a good involves a xed cost in addition to a constant marginal cost, so that the average cost is. The dixitstiglitz 1977 model of chamberlinian monopolistic competition model hereafter, ds has had an enormous impact on research in industrial organization, economic geography, monetary and real business cycle theory, growth theory, and especially in international trade.
Pdf ict as technical change in the matching and production. This aggregator function exhibits constant elasticity of substitution. Competition versus monopolistic competition by integrating. A guide to the very basics of dixitstiglitz are you starting a graduate course in international trade this fall. Specifically, it arises in a particular type of aggregate function which combines two or more types of consumption, or two or more types of productive inputs into an aggregate quantity. On the dixitstiglitz model of monopolistic competition. Thus, the toal cost function of 5 hereafter, the subscript i is dropped for simplicity. Handbook of economic growth elsevier volume 1b, pp. Chapter 21 a macroeconomic model of monopolistic competition. The home market effect and patterns of trade between rich.
The dixit stiglitz demand system and monpolistic competition. The dixit stiglitz 1977 model of chamberlinian monopolistic competition model hereafter, ds has had an enormous impact on research in industrial organization, economic geography, monetary and real business cycle theory, growth theory, and especially in international trade. A guide to the very basics of dixitstiglitz trade diversion. Monopolistic competition and optimum product diversity bavinash k. Its a simple general monopolistic model with n monopolistic goods, and a numeraire good labour w1. Ict as technical change in the matching and production. The origin of ces production function comes from arrow et al 1961. As dixit and stiglitz never refer this functional form to production, to call production function 1 the dixitstiglitz production function technology may be.
Product diversity 299 turning to the second stage of the prob lem, it is easy to show that for each i, 7 where y is defined by 4. The parameter 0,1 is the labor share of income and measures the degree of diminishing returns to scale. Equilibrium conditions for the simple new keynesian model. Rather than writing the production function, we write the. The dixitstiglitz economy with a small group of firms. The sales department maximizes profits subject to the production function 5 and. Monopolistic competition and optimum product diversity. The dixitstiglitz model 1977, hereafter ds model formalizes a tradeoff between economies of scale and consumption diversity.
Under increasing returns to scale monopolistic competition will lead to a greater degree of product differentiation than it is socially optimal. Following dixit and stiglitz 1977 we describe production of middle goods. Results from the dixitstiglitz monopolistic competition model. Alesina spolaore and wacziarg 2000 employ a dixit stiglitz production structure where more variety of intermediate inputs, that can be interpreted as more variety of individual skills, increases total output. The dixitstiglitz demand system and monpolistic competition. The basics of dixitstiglitz lite columbia university. In section 4 we consider the effects of technical change, lowering variable but increasing fixed costs of. The dixit and stiglitz 1977 paper actually contains three distinct models, yet economic literature has mostly taken up only the rst one constant elasticity case and its market equilibrium solution. On the supply side, the assumption is that the labour is perfectly mobile factor of production across. Constant elasticity of substitution ces, in economics, is a property of some production functions and utility functions specifically, it arises in a particular type of aggregator function which combines two or more types of consumption goods, or two or more types of production inputs into an aggregate quantity.
The dixitstiglitz demand system, monpolistic competition and trade. In this paper we integrate two workhorse models in economics. Final goods production function dixitstiglitz aggregator final goods production function benassy aggregator. In section 3 we analyse the existence and uniqueness of the model and the effects of technical progress in the matching function. Consumption ct,j is a dixitstiglitz aggregator of the consumption of varieties. In this subsection, we move closer to the dixitstiglitz basic model, by restricting our analysis, first to the economy introduced in section i of dixit and stiglitz 1977, with a homothetic utility function u and a symmetric ces aggregator function x, plus uniform costs for all producers, and second to the regime of price competition. Endogenous technology models with expanding varieties 1 2 dixitstiglitz framework based on, avinash dixit and joseph stiglitz, monopolistic competition and optimal product diversity, aer 1977. The dixitstiglitz demand system and monpolistic competition uio. It is well known that problems can arise for three broad reasons. For the seminal issue of the degree of goods price stickiness, it is goods markets on which we need to. Such markets are often thought to be characterized by well defined utility functions and homogenous production functions with constant and decreasing marginal productivities and constant returns to scale. Hence for this production function the elasticity of substitution. Since an increase in the size of an economy in the ds model enlarges agents scope for trading off economies of scale for consumption diversity, per capita real income, the number of goods and productivity increase with the size of an economy if there is. Substitutability and competition in the dixit stiglitz model, economics working papers eco200405, european university institute.
Pdf an integration of solows growth and dixitstiglitz. Endogenous technology models with expanding varieties 1 2 dixit stiglitz framework based on, avinash dixit and joseph stiglitz, monopolistic competition and optimal product diversity, aer 1977. The main results of this subset of dixit and stiglitz 1977 are derived and explained below in order to aid in understanding this widespread model. The share variety is a function of its price and the aggregated price. The home market effect and patterns of trade between rich and. Elements of advanced international trade1 treb allen2 and costas arkolakis3 february 2016 new version. Plainly, a fixed markup of price over marginal cost implies a fixed operating profit margin.
On the basis of the mode ling framework by dixit and stiglitz 1997, see also. Ideas, nonrivalry, and endogenous growth scandinavian journal of economics, july, pp. Although this type of model relies heavily on specific functional. For given nt,it is optimal to set i,t j,t for all i j 2 0,1 in this case.
The monopolistic competition model of dixit and stiglitz and the search unemployment model of pissarides. Develop an equilibrium framework that features love for variety i. It is assumed that the production is oligopolistic with price competition. Stiglitz the basic issue concerning production in welfare economics is whether a market solu tion will yield the socially optimum kinds and quantities of commodities. In the following section we merge the pissarides and the dixitstiglitz model. Contents preface acknowledgments chapter one americas 1 percent problem chapter two rent seeking and the making of an unequal society chapter three markets and inequality chapter four why it matters chapter five a democracy in peril chapter six 1984 is upon us chapter seven justice for all. Introduction i the dixit stiglitz apparatus is a central building block of modern macroeconomic theory, in both growth and business cycles. Such markets are often thought to be characterized by well defined utility functions and homogenous production functions with constant and decreasing marginal productivities. The dixitstiglitz model of monopolistic competition works only when is large. On the contrary, the approximation hypothesis is a very useful part of dixit and stiglitzs contribution. Marginal production costs are constant but increasing returns arise from three fixed costs paid just prior to production.
The dixit stiglitz preference structure franck portier based on gilles saintpaul lecture notes franck. Substitutability and competition in the dixitstiglitz model. On the supply side, the assumption is that the labour is perfectly mobile factor of production across the sectors, so. The dixit stiglitz demand system, monpolistic competition and trade.
On the contrary, the approximation hypothesis is a very useful part of dixit and stiglitz s contribution. But question is what makes we nd the ces production function should look like this. The dixitstiglitz preference structure franck portier based on gilles saintpaul lecture notes franck. Jul 24, 2015 constant elasticity of substitution ces, in economics, is a property of some production functions and utility functions. Dixitstiglitz used to study optimal product diversity in market where goods are. If so, youll soon be encountering the socalled dixitstiglitz ces function, a demand system that underlies trade economists work on everything from the gravity equation to the organization of multinational enterprises. Furthermore, we propose a convincing graphical exposition that emphasizes the. Pdf an integration of solows growth and dixitstiglitzs. Preferences are given by a weaklyseparable, convex utility function u ux 0.
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