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The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition

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  • Swati Dhingra
  • John Morrow

Abstract

A fundamental question in monopolistic competition theory is whether the market allocates resources efficiently. This paper generalizes the Spence-Dixit-Stiglitz framework to heterogeneous firms, addressing when the market provides optimal quantities, variety and productivity. Under constant elasticity demand, each firm prices above its average cost, yet we show market allocations are efficient. When demand elasticities vary, market allocations are not efficient and reflect the distortions of imperfect competition. After determining the nature of market distortions, we investigate how integration may serve as a remedy to imperfect competition. Both market distortions and the impact of integration depend on two demand side elasticities, and we suggest richer demand structures to pin down these elasticities. We also show that integration eliminates distortions, provided the post-integration market is sufficiently large.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1130.

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Date of creation: Feb 2012
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Handle: RePEc:cep:cepdps:dp1130

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Selection; monopolistic competition; efficiency; productivity; social welfare; demand elasticity;

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Citations

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Cited by:
  1. Mrázová, Monika & Neary, J Peter, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," CEPR Discussion Papers 9839, C.E.P.R. Discussion Papers.
  2. Mrázová, Monika & Neary, J Peter, 2013. "Selection Effects With Heterogeneous Firms," CEPR Discussion Papers 9288, C.E.P.R. Discussion Papers.
  3. ZHELOBODKO, Evgeny & KOKOVIN, Sergey & Parenti, Mathieu & THISSE, Jacques-François, . "Monopolistic competition beyond the constant elasticity of substitution," CORE Discussion Papers RP -2488, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Melitz, Marc J & Redding, Stephen J., 2013. "Heterogeneous Firms and Trade," CEPR Discussion Papers 9317, C.E.P.R. Discussion Papers.
  5. Kristian Behrens & Yasusada Murata, 2011. "Trade, Competition, and Efficiency (revised version)," Cahiers de recherche 1118, CIRPEE.
  6. Peter Neary & Monika Mrazova, 2013. "Not so demanding: Preference structure, firm behavior, and welfare," Economics Series Working Papers 691, University of Oxford, Department of Economics.
  7. Costinot, Arnaud & Rodriguez-Clare, Andres, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," CEPR Discussion Papers 9398, C.E.P.R. Discussion Papers.
  8. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.

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