2017 Articles

Monopolistic Competition, the Dixit–Stiglitz Model, and Economic Analysis

Stiglitz, Joseph E.

I welcome this opportunity to provide a comment for this Special Issue of Research in Economics honoring forty years since the publication of the Dixit-Stiglitz 1977 paper. I have been pleased both by the way that our simple parameterization has provided a tool that others in a variety of sub-disciplines—growth theory, macro-economics, and international trade—have found so useful. In many ways, I am not surprised—indeed, I was aware of some of these possible applications at the time that we wrote the paper. As I noted in the essay I wrote on the occasion of the 25th anniversary of our paper (Stiglitz, 2004), the standard competitive model—where every firm faces demand curves of infinite elasticity—leads to numerous conundrums. For instance, small open economy could quickly restore itself to full employment by a slight adjustment of the exchange rate—it would easily remedy any deficiency of aggregate demand. In almost all sectors of the economy, firms face downward sloping demand curves, and competition is “imperfect.”