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Substitutability and Competition in the Dixit-Stiglitz Model

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  • Koeniger, Winfried

    ()
    (University of St. Gallen)

  • Licandro, Omar

    ()
    (European University Institute)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1007.

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Length: 8 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1007

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Keywords: substitution; monopolistic competition; market power; output;

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References

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  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.
  3. Chad Syverson, 2004. "Product Substitutability and Productivity Dispersion," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 534-550, May.
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Cited by:
  1. 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.
  2. Helge Sanner, 2004. "Economy vs. History: What Does Actually Determine the Distribution of Firms' Locations in Cities?," Volkswirtschaftliche Diskussionsbeiträge, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät 67, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät, revised Sep 2004.
  3. Malte Mosel, 2010. "Competition, Imitation, and R&D Productivity in a Growth Model with Sector-Specific Patent Protection," CESifo Working Paper Series 3109, CESifo Group Munich.
  4. Simon Sosvilla-Rivero & Pedro N. Rodríguez, . "Linkages in international stock markets: Evidence from a classification procedure," Working Papers 2004-23, FEDEA.
  5. José A. Herce, . "Could this ever happen in Spain? Economic and policy aspects of a SARS-like episode," Working Papers 2004-09, FEDEA.

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