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Niroth Chhy
''A Simple Extension to the Dixit-Stiglitz Framework to Allow for Strategic Interaction''
( 2018, Vol. 38 No.2 )
This paper considers a simple extension to the Dixit-Stiglitz framework to allow for strategic interaction. We show that the markup under Bertrand competition is strictly lower than that under Cournot competition and is strictly higher than that under monopolistic competition. We also show that there are two opposing forces: the love for variety and price distortion. Under monopolistic competition, these forces offset one another, and the equilibrium is the second-best optimum. Under oligopolistic competition, price distortion dominates and, because of a lower markup, the social welfare under Bertrand competition is strictly higher than that under Cournot competition.
Keywords: Monopolistic competition, strategic interaction, Cournot competition, Bertrand competition
JEL: D4 - Market Structure and Pricing: General
L1 - Market Structure, Firm Strategy, and Market Performance: General
Manuscript Received : Feb 25 2018 Manuscript Accepted : Jun 21 2018

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