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Substitutability and Competition in the Dixit-Stiglitz Model

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Author Info
Winfried Koeniger
Omar Licandro

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Abstract

The effects of competition on growth are analyzed in the recent literature by comparing economies with the same market structure but different degrees of substitutability. In this note, we show that in a general equilibrium model with monopolistic competition à la Dixit-Stiglitz the effect of substitutability on the allocation of resources is independent of the associated change in competition. Higher substitutability increases welfare, output and productivity because resources shift towards the most productive sectors. However, since markups are equal across sectors, changes in market power do not affect the relative price of consumption goods, implying that the induced changes in market power do not have any direct effect on equilibrium allocations.

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Paper provided by FEDEA in its series Working Papers with number 2004-06.

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Handle: RePEc:fda:fdaddt:2004-06

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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. Chad Syverson, 2003. "Product Substitutability and Productivity Dispersion," NBER Working Papers 10049, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. 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!]
  3. 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)
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  4. Aghion, Philippe, et al, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Blackwell Publishing, vol. 68(3), pages 467-92, July.
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  1. Helge Sanner, 2004. "Economy vs. History: What Does Actually Determine the Distribution of Firms' Locations in Cities?," Volkswirtschaftliche Diskussionsbeiträge 67, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät, revised Sep 2004. [Downloadable!]
  2. Simon Sosvilla-Rivero & Pedro N. Rodríguez, . "Linkages in international stock markets: Evidence from a classification procedure," Working Papers 2004-23, FEDEA. [Downloadable!]
  3. José A. Herce, . "Could this ever happen in Spain? Economic and policy aspects of a SARS-like episode," Working Papers 2004-09, FEDEA. [Downloadable!]
  4. Helge Sanner, 2005. "Economy vs History - What Does Actually Determine the Distribution of Shops' Locations in Cities?," ERSA conference papers ersa05p175, European Regional Science Association. [Downloadable!]
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