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Monopolistic Competition with Firm-Specific Costs

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  • Montagna, Catia

Abstract

This paper extends a Dixit-Stiglitz model of monopolistic competition to allow for technical heterogeneity amongst firms. The dispersion of firms' technical efficiency within the industry is generated by a random process and is shown to lead to a steady-state spectrum of profits and market shares. Market structure is endogenously determined and the existence of efficiency gaps and the uncertainty faced by potential entrants are identified as the factor limiting rational entry. Thus, entry is shown not to eliminate long-run profits and, contrary to the homogeneous firms case and consistent with empirical findings, the model yields a positive relationship between concentration and profitability. Copyright 1995 by Royal Economic Society.

Suggested Citation

  • Montagna, Catia, 1995. "Monopolistic Competition with Firm-Specific Costs," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 318-328, April.
    • Handle: RePEc:oup:oxecpp:v:47:y:1995:i:2:p:318-28
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    Cited by:

    1. Churen Sun & Guoqiang Tian & Tao Zhang, 2013. "Special Issue. Guest Editor: Zhihao Yu," Review of Development Economics, Wiley Blackwell, vol. 17(3), pages 494-509, August.
    2. Ferdinand Rauch, 2008. "An explanation for the inverted-U relationship between competition and innovation," Vienna Economics Papers 0813, University of Vienna, Department of Economics.
    3. Sébastien Jean, 2002. "International Trade and Firms' Heterogeneity under Monopolistic Competition," Open Economies Review, Springer, vol. 13(3), pages 291-311, July.
    4. Montagna, Catia & Nocco, Antonella, 2008. "Labour Market Imperfections, International Integration and Selection," SIRE Discussion Papers 2008-21, Scottish Institute for Research in Economics (SIRE).
    5. Allanson, Paul & Montagna, Catia, 2005. "Multiproduct firms and market structure: An explorative application to the product life cycle," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 587-597, September.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Dermot Leahy & Catia Montagna, 1998. "Targeted Strategic Trade Policy with Domestic Cost Heterogeneity," Dundee Discussion Papers in Economics 100, Economic Studies, University of Dundee.
    8. Erling Holmøy & Torbjørn Hægeland, 1997. "Aggregate Productivity Effects of Technology Shocks in a Model of Heterogeneous Firms: The Importance of Equilibrium Adjustments," Discussion Papers 198, Statistics Norway, Research Department.
    9. Matthieu Crozet & Lionel Fontagné, 2010. "L'internationalisation des entreprises : une analyse microéconomique de la mondialisation," Économie et Statistique, Programme National Persée, vol. 435(1), pages 3-12.
    10. Yu Chen & Haiwen Zhou, 2017. "An Overlapping-Generations Model of Firm Heterogeneity in Economic Development," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 12(4), pages 660-676, December.
    11. Dhingra, Swati & Morrow, John, 2017. "Efficiency in large markets with firm heterogeneity," Research in Economics, Elsevier, vol. 71(4), pages 718-728.
    12. Haiwen Zhou, 2010. "Oligopolistic Competition, Firm Heterogeneity, and the Impact of International Trade," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 36(1), pages 107-119.
    13. Mohamed Suleiman and Mahmoud Nabi, "undated". "Unemployment and Labor Market Institutions: Theory And Evidence From the GCC," API-Working Paper Series 0806, Arab Planning Institute - Kuwait, Information Center.
    14. Fraser Summerfield, 2016. "Matching Skill and Tasks: Cyclical Fluctuations in the Overqualification of New Hires," Working Paper series 16-08, Rimini Centre for Economic Analysis.
    15. Molana, Hassan & Montagna, Catia, 2000. "Market structure, cost asymmetries, and fiscal policy effectiveness," Economics Letters, Elsevier, vol. 68(1), pages 101-107, July.
    16. Erling Holmøy, 2003. "Aggregate Industry Behaviour in a Monopolistic Competition Model with Heterogeneous Firms," Discussion Papers 352, Statistics Norway, Research Department.
    17. Erling Holmøy & Torbjørn Hægeland, 2000. "Aggregate Productivity and Heterogeneous Firms," Discussion Papers 266, Statistics Norway, Research Department.
    18. Jota Ishikawa & Yoshimasa Komoriya, 2010. "Stay Or Leave? Choice Of Plant Location With Cost Heterogeneity," The Japanese Economic Review, Japanese Economic Association, vol. 61(1), pages 97-115, March.
    19. Etro, Federico, 2017. "Research in economics and monopolistic competition," Research in Economics, Elsevier, vol. 71(4), pages 645-649.
    20. Jang Ping Thia, 2008. "The Impact of Trade on Aggregate Productivity and Welfare with Heterogeneous Firms and Business Cycle Uncertainty," CEP Discussion Papers dp0883, Centre for Economic Performance, LSE.
    21. repec:dun:dpaper:89 is not listed on IDEAS

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