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Variety, Globalization, and Social Efficiency
Author(s) -
Cox W. Michael,
Ruffin Roy J.
Publication year - 2010
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2010.76.4.1064
Subject(s) - monopolistic competition , economics , constant elasticity of substitution , elasticity (physics) , elasticity of substitution , globalization , microeconomics , per capita , variety (cybernetics) , price elasticity of demand , economies of scale , mathematics , market economy , monopoly , population , statistics , materials science , demography , production (economics) , sociology , composite material
The standard formal presentation of the Dixit‐Stiglitz‐Krugman (DSK) model of monopolistic competition with a constant‐elasticity‐of‐substitution (CES) utility function supposes a sufficient number of firms so that the elasticity of demand facing each variety is approximated by a constant elasticity of substitution. Such a formulation forces economies of scale to be frozen so that firm size never changes. We use a Bertrand‐Nash interpretation of the equilibrium that allows the elasticity of demand facing each variety to depend on the number of varieties, thus allowing the gains from globalization to reflect both the increase in variety and the exploitation of economies of scale. We also develop a precise expression for per capita real income with any number of sectors and examine the age‐old question of the socially optimal number of varieties.