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Paolo Bertoletti and Federico Etro
''Pricing to market in the Krugman model''
( 2014, Vol. 34 No.1 )
We examine the role of per capita income in closed and open economy models of monopolistic competition based on non-homothetic directly additive preferences à la Dixit-Stiglitz, as in Krugman (1979). In a closed economy with free entry income is always neutral on markups and firm size. In a two-country trade model without transport costs, markups are higher in the country with higher income if the elasticity of substitution is decreasing in consumption. Pricing to market also emerges with transport costs.
Keywords: Pricing to market, Krugman model, Dixit-Stiglitz model
JEL: D4 - Market Structure and Pricing: General
F1 - Trade: General
Manuscript Received : Dec 27 2013 Manuscript Accepted : Mar 06 2014

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