Substitutability and Competition in the Dixit-Stiglitz Model
AbstractThe 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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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1007.
Length: 8 pages
Date of creation: Feb 2004
Date of revision:
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Other versions of this item:
- Winfried KOENIGER & Omar LICANDRO, 2004. "Substitutability and Competition in the Dixit-Stiglitz Model," Economics Working Papers, European University Institute ECO2004/05, European University Institute.
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
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