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1. Mon-comp details and our EERC grant
New-new market theory
EERC
Monopolistic Competition among Market Theories
and EERC among Researchers
S.Kokovin
2016
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2. 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

3. Mon-comp details and our EERC grant
New-new market theory
EERC
Outline
1 Mon-comp details and our EERC grant
2 New-new market theory
3 EERC
. .

4. 3 kinds of market theories
(1) Perfectly competitive markets: free entry, indenitely 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 dierentiated good (telephony and Internet
providers?) - Cournout, Bertrand,... Maskin-Tirole (1988). Spatial
tradition: Hotelling (1930), Salop (1976)...
(3) Monopolistically competitive markets: free entry, big denite
mass of rms-price-makers, dierentiated good, decreasing or
increasing 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...
.

5. Mon-comp details and our EERC grant
New-new market theory
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, distortion
from insucient or excessive competition, innovative growth, mutual
trade, agglomeration in economic geography ...
Monopolistically-competitive theory 2: coexisting weak and
strong rms, creative destruction, selection eects, turnover of
rms...
...
. .

6. How new market theory evolved
Chamberlin (1929): basic idea - incomplete substitution, inrceasing
returns, free entry...
Dixit and Stiglitz (1977): formal model - existence, ineciency
theorem, 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) ....

7. 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 developes
quickly under pressure of new rm-level data and consumer-level data.
CGE will sooner or later bring good forecasts.

8. Mon-comp details and our EERC grant
New-new market theory
EERC
Common hypotheses of any monopolistic competition
1 Dierentiated 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 and
sectors...
. .

9. Mon-comp details and our EERC grant
New-new market theory
EERC
Basic model: consumers
Facing N varieties, each of L consumers with income I chooses
consumption-vector X ≡ (xi )i∈[0,N] to maximize:
max
X≥0
N
∑
0
u(xi ) ;
N
∑
0
pi xi = I or
max
X≥0
N
0
u(xi )di ;
N
0
pi xi di = 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.
. .

10. Mon-comp details and our EERC grant
New-new market theory
EERC
Model: producers, equilibrium
Each rm i takes competition λ parametrically and chosses output/prices:
max
xi ≥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 (¯x, ¯p,¯λ, ¯N) consumption, price, competition,
mass of rms, satisfying free-entry and labor balance:
π(¯x,¯λ) = 0, LE = C (L¯x) ¯N. (4)
. .

11. Utilities used: power xa (CES), quadratic, CARA
CES-model predicts constant markups, but rms operating in bigger
markets have lower markups (Syverson, 2007).
CES-model predicts constant output, but rms tend to be larger in
larger 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 the
conclusions change when the utility functions or functional form of
transport cost change? Certainly, examples are a rst step in a
research program. But they are usually not the last. [: Berliant
(2006):]

12. Mon-comp details and our EERC grant
New-new market theory
EERC
EERC grant 2009 Kokovin-Zhelobodko
We have generalized basic Mon-Comp model, simplifying its equations to:
ER(¯x) ≡ 1 −ru(¯x) = EC (L¯x), ¯M = |Eu (¯x)|, ¯N = E L/C(L¯x)
where Ef (x) ≡ x
f · df (x)
dx - is elasticity operator for any f ,
R(x) ≡ p∗(xi ,λ)xi - revenue per consumer, M ≡
¯p−C (¯x)
¯p - markup, L¯x -
output.
These simplications allowed to derive general necessary and sucient
conditions on utilities and costs u(.), C(.) for price-increasing
(price-decreasing) eects of market size (trade) and other comparativ
statics eects. 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!
. .

13. Mon-comp details and our EERC grant
New-new market theory
EERC
Shumpeterian stochastic industry
Iovanovich (1982), Hopenhayn (1992), Asplund-Nocke (2006): rm's
productivity is stochastic in any period, not only at rm's birth (as in
Melitz-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 and
turnover are important! Area for research, so far.
. .

14. Mon-comp details and our EERC grant
New-new market theory
EERC
2-D heterogeneity: Helpman-Itshoki-Redding 2010
Helpman-Itshoki-Redding (2010) Econometrica: Inequality and
unemployment in a global economy. = Mainstream theory and
estimates.
This paper, and numerous subsequent papers, extend Melitz-2003 to
heterogeneous labor for heterogeneous rms and explains: curve of
prots, curve of wages, unemployment - in connection with international
trade.
Main idea: better rms select better labor during stochastic search.
International trade facilitates this process, which enhance benets for
strong rms/workers but deteriorates welfare of weak segment.
. .

15. Mon-comp details and our EERC grant
New-new market theory
EERC
2-D consumer heterogeneity
Ottaviano (2016?), Kokovin-Goryunov-Tabuchi (2016?),
Kokovin-Tarasov-Sharapudinov (2016?): heterogeneous rms and
heterogeneous consumers
This approach combines Hotelling and Chamberlin: linear city of
consumers' tastes and continuum of rms choosing their
prices/locations in the space of consumer types. Eects:
Stronger rms locate in best sites, weaker rms locate among
exotic consumers. Stronger rms export to best sites abroad.
Clusterization: rms set standards because of competition, not
only because of technology
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16. Mon-comp details and our EERC grant
New-new market theory
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 dieerntiated industry.
Strategic considerations vanish! Big rms behave like small, because
of free entry of small.
. .

17. Mon-comp details and our EERC grant
New-new market theory
EERC
Various demand specications
Bertoletti-Etro (2015) Dual-additive utility: consumer's
expenditure function is assumed additive, instead of direct
utility. This approach allows good modelling of income eects,
while usual one is good for market size eects.
Parenti-Ushev-Thisse Towards a general theory of
monopolistic competition (2016?).
...
Good estimation and computable prognostic models are
among new challenges
. .

18. Mon-comp details and our EERC grant
New-new market theory
EERC
EERC was a great help
For dozens of us, economists surviving in Marxian desert of Soviet
Union, EERC was always a gulp of water, a fresh air of real scientic
discussion and real expertize
A.Einstein said that physics develops not from idea to idea but from
grave to grave. This is true about economics in FSU. Low standards
of research are reproducing themselves in hundreds of universities.
New vine for new bottles. EERC, New Economic School, Kiev
School of Economics, Higher School of economics are exceptions
and exceptionally useful!
EERC, NES, KSE, HSE actually produced a new, productive
generation of economists in FSU
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19. Conclusions
Some achievements of theory are behind, big challenges
ahead. New data and new ideas are the engine of revolutionary
developments in theory.
EERC was always a great source of expertize and support
for emerging true economic science in Former-Soviet-Union
We express deep gratitude to the EERC team and its great
experts!
Thank you!!