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On the Foundations of Monopolistic Competition and Economic Geography

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Abstract

This book presents important work by B. Curtis Eaton and Richard G. Lipsey on product differentiation, including studies of spatial differentiation and the industrial structures that give rise to this phenomenon. The book opens with an introductory overview essay and explains why the authors reject the neoclassical, competitive vision of the economy. The essays included cover issues such as: the theory of multinational plant location, product differentiation, monopoly, models of value theory, capital with special reference to entry and exit barriers and entry equilibrium, the existence of pure profit and the theory of market pre-emption.
... Chamberlinian theory of monopolistic competition formalised mainly by Dixit and Stiglitz (1977) has been extensively used in the literature. Nevertheless, it is subject to severe criticism by Kaldor (1935) and Eaton and Lipsey (1977): "a new product must necessarily be placed in between two existing products; and will thus make considerable inroads into the markets of his nearest neighbours (Kaldor 1935)."This criticism is most relevant when each consumer purchases only one good as in Hotelling's spatial competition. ...
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Our novel approach enriches the general additive monopolistic competition model with a space of product characteristics: consumers’ “ideal varieties”. This paper bridges two traditions in modelling markets with horizontal product differentiation: the Hotelling’s (Econ J 39(153):41–57, 1929) “address economy” and Chamberlinian Dixit–Stiglitz monopolistic competition. Unlike Hotelling, our partially localised competition involves intersecting zones of service among producers. When population grows, increasing/decreasing elasticity of elementary utility governs increasing/decreasing prices. Increasing market size induces an increase in the firm density, but with the presence of transport cost, the firm’s range of service decreases, consumers concentrate their consumption closer to their ideals, and there are savings in transport costs. Thereby, finer matching among buyers/sellers becomes the important welfare benefit from a thicker market. That is, our model sets a finer matching of goods to tastes as a new source of gains rather than variety being the only reason for gains. Free entry remains socially excessive, under natural preferences.
... What I have in mind are assembly lines, bridges, transportation and communication networks, giant presses and complex manufacturing plants, which are available in specific discrete sizes, and whose economic usefulness manifests itself only when the scale of operation is large." Also Eaton and Lipsey (1997) argue that the very existence of capital goods with a lump of embodied services (rather than disembodied service flows) points to fundamental nonconvexities in production. ...
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This contribution focuses on testing the empirical impact of the convexity assumption in estimating costs using nonparametric specifications of technology and cost functions. Apart from reviewing the scant available evidence, the empirical results based on two publicly available data sets reveal the effect of the convexity axiom on cost function estimates: cost estimates based on convex technologies turn out to be on average between 21% and 38% lower than those computed on nonconvex technologies. These differences are statistically significant when comparing kernel densities and can be illustrated using sections of the cost function estimates along some output dimension. Finally, also the characterization of returns to scale and economies of scale using production and cost functions for individual units yields conflicting results for between 19% and 31% of individual observations. The theoretical known potential impact as well as these empirical results should make us reconsider convexity in empirical production analysis: clearly, convexity is not harmless.
... In fact, there are a number of models which imply sustained monopoly profits, even in the presence of entry. For a series of references, seeEaton and Lipsey (1997), and their Chapter 6 in particular. ...
Article
This paper analyses the general equilibrium effects on asset valuation and capital accumulation of an exogenous drop in the rate of return required by investors in a model of production with imperfectly competitive product markets. The model improves substantially on the standard perfectly competitive neo-classical framework, by dissociating the behavior of marginal and average q. It tracks more closely current observed data on the ratio of stock-market value to the economy's capital base, while uncoupling this valuation ratio from investment behavior. The model does so by assuming that asset holders price not only the future marginal productivity of capital, but also the value of monopoly franchises, which arise from the interplay of market power and returns to scale.
... Once a business is established at a specific geographical location, it is then 'locked in' through learning, circular and cumulative causation effects. In this sense '…history matters in a way that it does not in neo-classical theory…' (Eaton and Lipsey, 1997, p. xxv). Two questions are relevant here: Are there inherent differences among locations that create predestination for certain activities? ...
Article
We explore disciplinary boundary-making in geographical economics or “the new economic geography” with attention to the approaches taken by, and attempts at communication among, scholars with primary affiliations in economics, geography, and regional science. The Dixit-Stiglitz general equilibrium approach to monopolistic competition and increasing returns was applied to agglomeration and location by Paul Krugman, who had previously pioneered the “new trade theory” building on the Dixit-Stiglitz model, and, independently and slightly earlier, by Masahisa Fujita and his student Heshem Abdel-Rahman, starting from regional science, a tradition with its own departments, doctorates, conferences, and journals distinct from economics and geography. Economic geography, as studied by geographers, had already taken a quantitative and theoretical turn in the 1960s, reviving an earlier tradition of German location theory overshadowed within geography after World War II by areal differentiation. Another strand of economic geography pursued by geographers was influenced by economic theory but by non-neoclassical Marxian and Sraffian economics. Debates between these scholars raised questions whether these analyses were multidisciplinary, drawing on distinct disciplines, or crossed disciplinary boundaries (as when geographical economics in the style of economists is undertaken in geography departments) or transcends disciplinary boundaries, or involved the emergence of a new discipline.
Chapter
Richard Lipsey has had a wide-ranging career as a researcher, a teacher, a textbook author and participant in matters of economic policy. In all of these, technical facility is used to enhance understanding of economic matters and not for its own sake. His approach is not to simply go with the flow, but to think carefully about the nature and practice of economic enquiry. Lipsey combines a practical focus of investigation with a lifelong concern with methodology. His passionate belief in the importance of economic understanding makes him an engaging and stimulating colleague. In his years at LSE and after, Lipsey created and continues to create a special intellectual environment and to be a part of it is both a pleasure and of great benefit.
Chapter
This paper discusses the influence on my research and writings of several methodological principles that we, the members of the LSE Staff Seminar on Methodology, Measurement and Testing, learned directly from Joseph Agassi and indirectly from Karl Popper. It begins with the origins of the seminar and my textbook, An Introduction to Positive Economics. It goes on to cover methodological issues that arose in my subsequent papers, including: the importance of having empirical content in economic theories, the poverty of theories that are built only to pass sunrise tests, why non-robust assumptions need to be tested, the concept of refutability, the fussy distinction between normative and positive statements, the impossibility of giving purely positive policy advice, the testing of existential statements, fallacious attempts to deduce empirical propositions from definitional identities, the distinction between internally and externally driven research programs, the poverty of modern welfare economics as a guide to policy and the possibility of deriving policy advice without such guidance. It concludes with a short discussion of the revolutionary implications of accepting technological change as being generated endogenously under conditions of genuine uncertainty rather than measurable risk.
Article
The Christian-Muslim Frontier describes the historical formation of this zone, and its contemporary dimensions: geopolitical, psychological, economic and security. Special attention is given to the concept of state-frontiers, to the effects of the uneven development of nation states and the contemporary interspersing of communities, which creates new functional frontiers. Further, the frontier is described as a mental construction, imagined by people in their search for social order, individual and collective security. Apostolov demonstrates that it is the political and economic situation of the local people that determines whether these frontiers result in conflict or cooperation. Rather than imposing unilateral principles of good governance, and to ensure cooperation prevails in Christian-Muslim relations, he argues that world society needs to undertake multilateral efforts to build participatory political institutions that accommodate groups with different identities.
Article
Introduction The factors explaining the development of geo-merchandizing A typology of geo-merchandizing approaches The implementation of geo-merchandizing Conclusion References
Book
This book provides a comprehensive, up-to-date, and expert synthesis of location theory. What are the impacts of a firm's geographic location on the locations of customers, suppliers, and competitors in a market economy? How, when, and why does this result in the clustering of firms in space? When and how is society made better or worse off as a result? This book uses dozens of locational models to address aspects of these three questions. Classical location problems considered include Greenhut-Manne, Hitchcock-Koopmans, and Weber-Launhardt. The book reinterprets competitive location theory, focusing on the linkages between Walrasian price equilibrium and the localization of firms. It also demonstrates that competitive location theory offers diverse ideas about the nature of market equilibrium in geographic space and its implications for a broad range of public policies, including free trade, industrial policy, regional development, and investment in infrastructure. With an extensive bibliography and fresh, interdisciplinary approach, the book will be an invaluable reference for academics and researchers with an interest in regional science, economic geography, and urban planning, as well as policy advisors, urban planners, and consultants. © Springer Science+Business Media, LLC 2010. All rights reserved.
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