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Product Diversity, Strategic Interactions and Optimal Taxation

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  • V. LEWIS

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Abstract

The entry of a new product increases consumer surplus through additional product di- versity but decreases firm profits. In markets where .rm entry intensi.es competition and reduces markups through strategic interactions, we expect entry to be excessively high. In a simple general equilibrium model, this is true for industries with very similar goods. If goods are instead highly differentiated, entry is below optimum. In both cases, the optimal policy is a labour subsidy and a tax on entry. If labour subsidies are unavailable, subsidising entry is optimal for industries with low degrees of product differentiation.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 10/661.

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Length: 10 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:rug:rugwps:10/661

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Keywords: product diversity; entry; strategic interactions; optimal taxation;

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  1. Rebekka Christopoulou & Philip Vermeulen, 2008. "Markups in the euro area and the US over the period 1981-2004 - a comparison of 50 sectors," Working Paper Series 856, European Central Bank.
  2. David E. Weinstein & Christian Broda, 2004. "Globalization And The Gains From Variety," Econometric Society 2004 Latin American Meetings 327, Econometric Society.
  3. Barseghyan, Levon & DiCecio, Riccardo, 2011. "Entry costs, industry structure, and cross-country income and TFP differences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1828-1851, September.
  4. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
  5. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
  6. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago.
  7. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
  8. Fabio Ghironi & Sanjay K. Chugh, 2011. "Optimal Fiscal Policy with Endogenous Product Variety," Boston College Working Papers in Economics 775, Boston College Department of Economics.
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