Fundamental Relations in a Monopolistic Competition

Author:Florin Dan Puscaciu, Rose Marie Puscaciu
Position:1Danubius University Galati, Faculty of Economic Sciences
European Integration - Realities and Perspectives
Fundamental Relations in Monopolistic Competition
of Dixit-Stiglitz Type
Florin-Dan Puscaciu
, Rose-Marie Puscaciu
Danubius University Galati, Faculty of Economic Sciences,
Danubius University Galati, Faculty of Economic Sciences,
Abstract: This work aims at clarifying t he main theoretical aspects of the monopolistic competition Dixit-
Stiglitz type; this is c onsidered a reference point in ec onomics theory, and also a basis in the prolific field,
that is New Ec onomics Geography. The subject helps to an extent the economic research in modeling the
international trade. We must mention that in this paper we are focusing only on the demand.
Keywords: monopolistic competition; maximizing of utility; price index
General Framework
We consider that the economy consists of two territorial entities, which could be two regions, two
countries, as well as two sectors, alleged industry and agricultural. The consumers from regions are
represented by workers and farmers. The farmers received an income for the job done at the farms in
the regions from where they are. They can play a double role: as farmers and as workers at the farms.
As they are the owners are employees of that farm. The income flow of the farmers is a part of
bilateral transfer: they are receiving an income from the owners, i.e. a wage; in turn they are offering a
work, a service. Farmers’ owners are using work of the farms, in order to produce agricultural goods
under monopolistic competition conditions and increasing returns of scale. The agricultural goods are
sold to the consumers from both regions and there are no transportation costs. Taking into account the
presumption of perfect competition in this sector, there will be an agricultural good which is not
differentiated. The work used in this sector is presumed to be immobile between regions. There is also
an industrial sector, which consists of number of companies, each of them producing a different good,
i.e. a single good for which they used only labor, under internal scale economies. These presumptions
make the companies to act under monopolistic competition in order to establish the price of their
products. Industrial goods are different, and each company activating in this sector are producing a
single good, i.e. a single variety of industrial good. The trade between sectors assumes transport costs.
The labor employed in this sector is mobile between sectors.
In order to view the assumptions is useful to draw the schematically diagram of the core-periphery
model, where we insert only the types of competition as in figure 1.

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