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Monopolistic Competition and Efficiency under Firm Heterogeneity and Nonadditive Preferences

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  • Kyle Bagwell
  • Seung Hoon Lee

Abstract

We consider the single-sector version of the Melitz-Ottaviano model of monopolistic competition with heterogeneous firms. We characterize the first-best and market allocations. We find that the market provides the first-best level of entry but too little selection; hence, the market provides too many varieties and too little aggregate quantity, and allocates too little (much) production to low (high) cost realizations. Allowing for a broad family of quantity allocation functions, we establish sufficient conditions for the global optimality of the first-best solution. Several important extensions are also examined.

Suggested Citation

  • Kyle Bagwell & Seung Hoon Lee, 2023. "Monopolistic Competition and Efficiency under Firm Heterogeneity and Nonadditive Preferences," American Economic Journal: Microeconomics, American Economic Association, vol. 15(4), pages 208-267, November.
    • Handle: RePEc:aea:aejmic:v:15:y:2023:i:4:p:208-67
    DOI: 10.1257/mic.20210099
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General

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