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Aggregate Industry Behaviour in a Monopolistic Competition Model with Heterogeneous Firms

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    Abstract

    The paper analyses how a tractable representation of productivity heterogeneity among firms modifies the standard Dixit-Stiglitz (DS) model of monopolistic competition. The properties of the asymmetric model are explored by comparative statics analysis. The equilibrium adjustments of industry aggregates, such as the number of firms, output and the productivity of variable inputs are compared with the corresponding adjustments in the symmetric model. The analysis thereby clarifies when and why the standard DS model may provide a misleading picture of the aggregate industry behaviour. A by-product of the paper is to demonstrate that a more realistic description of a basic aspect of technology heterogeneity can be taken into account at a relatively low cost in terms of reduced tractability.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp352.pdf
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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 352.

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    Date of creation: Jun 2003
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    Handle: RePEc:ssb:dispap:352

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    Keywords: Monopolistic competition; productivity heterogeneity; aggregation;

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    1. Leahy, D. & Montagna, C., 1997. "Strategic Trade Policy With Domestic Cost Asymmetries," Papers 97/27, College Dublin, Department of Political Economy-.
    2. Tor Jakob Klette & Astrid Mathiassen, 1995. "Job Creation, Job Destruction and Plant Turnover in Norwegian Manufacturing," Discussion Papers 136, Research Department of Statistics Norway.
    3. Montagna, Catia, 1995. "Monopolistic Competition with Firm-Specific Costs," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 318-28, April.
    4. Klette, T.J., 1998. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Memorandum 15/1998, Oslo University, Department of Economics.
    5. 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.
    6. Brakman,Steven & Heijdra,Ben J. (ed.), 2003. "The Monopolistic Competition Revolution in Retrospect," Cambridge Books, Cambridge University Press, number 9780521819916, October.
    7. Erling Holmøy & Torbjørn Hægeland, 1997. "Aggregate Productivity Effects of Technology Shocks in a Model of Heterogeneous Firms: The Importance of Equilibrium Adjustments," Discussion Papers 198, Research Department of Statistics Norway.
    8. Brakman, Steven & Heijdra, Ben J., 2002. "The monopolistic competition revolution in retrospect," CCSO Working Papers 200215, University of Groningen, CCSO Centre for Economic Research.
    9. C Montagna, . "Strategic Trade Policy When Firms Have Different Efficiency Levels," Dundee Discussion Papers in Economics 070, Economic Studies, University of Dundee.
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