Increasing returns to scale create this scenario in a Paul Krugman paper that modifies the (*) Dixit-Stiglitz model to explain trade between countries with similar factor endowments.
Olivier Blanchard and Nobuhiro Kiyotaki showed this feature alone could not explain how aggregate demand affects output. A 1977 model of this scenario includes a utility function with a parameter p that controls the preference for diversity. In this scenario, the long-run demand and average cost curves must be tangent while their slopes are negative, causing equilibrium prices to be higher than marginal cost. Increasing returns to scale create this scenario in a Paul Krugman paper that modifies the (*) Dixit-Stiglitz model to explain trade between countries with similar factor endowments. It was first analyzed in the 1930s by Joan Robinson and Edward Chamberlin, who set out assumptions such as free market entry and many firms. For 10 points, name this type of imperfectly competitive market in which firms can set prices because they produce differentiated products.
Olivier Blanchard and Nobuhiro Kiyotaki showed this feature alone could not explain how aggregate demand affects output.
monopolistic competition [prompt on imperfect competition; do not prompt on or accept "oligopoly" or "monopoly"]