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TASTE FOR VARIETY AND ENDOGENOUS FLUCTUATIONS IN A MONOPOLISTIC COMPETITION MODEL

Published online by Cambridge University Press:  01 September 2008

Thomas Seegmuller
Thomas Seegmuller*
Affiliation:
Paris School of Economics
*
Address correspondence to: Thomas Seegmuller, CNRS and University Paris 1, Paris School of Economics, Centre d'Economie de la Sorbonne, 106-112 Boulevard de l'Hôpital 75647 Paris Cedex 13, France; e-mail: seegmu@univ-paris1.fr.
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Abstract

In past years, imperfect competition has been introduced in several dynamic models to show how markup variability, increasing returns (decreasing marginal cost), and monopoly profits affect the occurrence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety as a result of endogenous product diversity. Introducing monopolistic competition [Dixit and Stiglitz (1977), Benassy (1996)] in an overlapping generations model in which consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small, and a not too elastic labor supply. The key mechanism for this result is based on the fact that, because of taste for variety, the aggregate price decreases with the procyclical product diversity, which has a direct influence on the real wage and the real interest rate.

Keywords

Endogenous FluctuationsTaste for VarietyImperfect Competition
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 4 , September 2008 , pp. 561 - 577
Copyright
Copyright © Cambridge University Press 2008

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