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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)

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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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): topics.6 (2006)
Issue (Month): 1 ()
Pages: 2

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Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:1:n:2

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Web page: http://www.degruyter.com

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Related research

Keywords: substitutability; market structure; monopolistic competition; Bertrand competition; Dixit-Stiglitz;

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Cited by:
  1. Bucci, Alberto & Parello, Carmelo Pierpaolo, 2009. "Horizontal innovation-based growth and product market competition," Economic Modelling, Elsevier, vol. 26(1), pages 213-221, January.
  2. Omar Licandro & Antonio Navas-Ruiz, 2007. "Trade liberalization, competition and growth," Economics Working Papers we076536, Universidad Carlos III, Departamento de Economía.
  3. Paolo Epifani & Gino Gancia, 2010. "Trade, markup heterogeneity and misallocations," IEW - Working Papers 469, Institute for Empirical Research in Economics - University of Zurich.
  4. Sara Amoroso & Peter M. Kort & Bertrand Melenberg & Joseph Plasmans & Mark Vancauteren, 2010. "Firm Level Productivity under Imperfect Competition in Output and Labor Markets," CESifo Working Paper Series 3082, CESifo Group Munich.
  5. Boyan Jovanovic, 2009. "When should firms invest in old capital?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 107-123.
  6. Nakajima Jouchi, 2011. "Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-24, October.
  7. Navas, Antonio, 2010. "La Apertura al Comercio Exterior y sus Efectos sobre la Productividad en Presencia de Diferencias Intersectoriales," Working Papers in Economic Theory 2010/04, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  8. 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.

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