Monotone Comparative Statics under Monopolistic Competition

Posted by D. Daniel Sokol

Peter Arendorf Bache (Department of Economics and Business, Aarhus University) and Anders Laugesen (Department of Economics and Business, Aarhus University) describe Monotone Comparative Statics under Monopolistic Competition

ABSTRACT: We let heterogeneous firms face decisions on an arbitrary number of complementary activities in a monopolistically-competitive industry. The key insight is that firm-level complementarities may manifest themselves much more clearly at the industry level than at the firm level of analysis. The response of an individual firm to exogenous changes in the parameters of its profit maximisation problem is ambiguous due to indirect effects through changes in industry competition. Only in special cases are firm-level comparative statics monotone. Turning to the industry level, we provide sufficient conditions for firstorder stochastic dominance shifts in the equilibrium distributions of all activities regardless of the ambiguities prevailing at the firm level. Our results apply to many well-known models of international trade and provide strong, novel, and testable predictions. A technical contribution is to apply powerful superm! odular optimisation techniques in a context of monopolistic competition.