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On the Use of Substitutability as a Measure of Competition

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Author Info
Winfried Koeniger (IZA, University of Bonn)
Omar Licandro (European University Institute, FEDEA)

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Abstract

In the recent macro literature the effect of competition has been analyzed by comparing economies with the same market structure but different degrees of substitutability. In this note, we argue that this approach may mingle the price effect of competition with a pure allocation effect. To illustrate the limitations of using the elasticity of substitution as a measure of competition, we present an example in which changes in the elasticity alter equilibrium allocations, but changes in the degree of market power do not. We use a simple static general equilibrium model in which sectors have different productivity. Then, higher substitutability always shifts resources towards the more productive sectors. Instead, changes in the market structure (monopolistic competition versus Bertrand duopoly) do not affect the relative price of consumption goods if the markups are symmetric, implying that the induced changes in competition do not have any price effect on equilibrium allocations.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 1 ()
Pages: 1283-1283
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Handle: RePEc:bep:mactop:v:6:y:2006:i:1:p:1283-1283

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Related research
Keywords: substitutability market structure monopolistic competition Bertrand competition Dixit-Stiglitz

Find related papers by JEL classification:
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Boone, J., 2004. "A new way to measure competition," Discussion Paper 31, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  2. Benassy, Jean-Pascal, 1998. "Is there always too little research in endogenous growth with expanding product variety?," European Economic Review, Elsevier, vol. 42(1), pages 61-69, January. [Downloadable!] (restricted)
    Other versions:
  3. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September. [Downloadable!]
    Other versions:
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
    Other versions:
  5. Boone, J., 2000. "Competition," Discussion Paper 104, Tilburg University, Center for Economic Research. [Downloadable!]
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  6. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-77, March. [Downloadable!] (restricted)
  7. Piercarlo Zanchettin & Vincenzo Denicolò, 2004. "Competition and Growth in Neo-Schumpeterian Models," Discussion Papers in Economics 04/28, Department of Economics, University of Leicester. [Downloadable!]
  8. Antonio, MINNITI, 2003. "Competition, R&D Activities and Endogenous Growth," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2004009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  9. Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November. [Downloadable!] (restricted)
  10. Alberto BUCCI, 2004. "An inverted-U relationship between product market competition and growth in an extended Romerian model," Departemental Working Papers 2004-26, Department of Economics University of Milan Italy. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Licandro, Omar & Navas-Ruiz, Antonio, 2007. "Trade Liberalization, Competition and Growth," CEPR Discussion Papers 6500, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Paolo Epifani & Gino Gancia, 2007. "Procompetitive Losses from Trade," Economics Working Papers 1037, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  3. Boyan Jovanovic, 2008. "When Should Firms Invest in Old Capital?," NBER Working Papers 14000, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," NBER Working Papers 14383, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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