Consumer Preferences in Monopolistic Competition Models

This paper develops a novel approach to modeling preferences in monopolistic competition models with a continuum of goods. In contrast to the commonly used CES preferences, which do not capture the e¤ects of consumer income and the inten-sity of competition on equilibrium prices, the present preferences can capture both e¤ects. I show that under an unrestrictive regularity assumption, the equilibrium prices decrease with the total mass of available goods (which represents the inten-sity of competition in the model) and increase with consumer income. The former implies that the entry of \u85rms in the market or opening a country to international trade has a pro-competitive e¤ect that decreases equilibrium prices