Question

Draw the graphs (2) of Chamberlinian and Dixit-Stiglitz monopolistically competitive equilibrium. Explain what the Chamberlinian and Dixit-Stiglitz models predict about the optimality of product variety. What accounts for the different conclusions?

Answer 1

The Chamberlinian and dixit-stiglitz model contributes to the conflicts on the optimality of product diversification by developing a model where monopolistically competitive equilibrium superimposes social optimum outcome.

Earlier papers by Dixit-stiglitz assumed that technology was constant across firms but later heterogeneity was introduced across internationally trading firms and this heterogeneity leads to a transformation from a competitive outcome to a socially optimum equilibrium.

When there exists homogeneity across firms it is easy to compute that competitive equilibrium leads to socially efficient firms but heterogeneity can make some firms earn more by reducing their markup cost and lump sum transfer from more efficient to less efficient firms.

corrobarating with Chamberlin, defines a large group monopolistic competition with producers surrounded with diversity. this also became the basis of heterogeneous Ricardian theory with gaps in productivity and profit levels across firms.

Unrestricted access to all the technologies is necessary and sufficient condition to derive competitive market equilibrium when multiple technologies are allowed in Dixit-Stiglitz model. If all the firms choose from the given technologies, there exists numerous monopolistcally competitive equilibria as well as social optimum unlike in the Ricardian model with heterogeneity in technology.