Quaderni del Dipartimento di Scienze Economiche e Matematico-Statistiche dell'Università del Salento - Collana di Economia

We introduce non-homothetic preferences in the Dixit-Stiglitz model of monopolistic competition, and enquire about the effects of a change in income dispersion on the firms’ optimal decisions and market equilibrium. Income dispersion, modelled as a mean preserving spread, is shown to affect only the degree of product differentiation under the standard hypothesis on the firms’ decision making process, while it generates a positive co-movement of demand and demand elasticity, when the negligibility assumption is removed and the price index e?ect is taken into account.