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Aggregate Industry Behaviour in a Monopolistic Competition Model with Heterogeneous Firms

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Author Info
Erling Holmøy () (Statistics Norway)
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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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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Related research
Keywords: Monopolistic competition; productivity heterogeneity; aggregation;

Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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  1. 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.
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  2. Montagna, Catia, 1995. "Monopolistic Competition with Firm-Specific Costs," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 318-28, April. [Downloadable!] (restricted)
  3. Leahy, D. & Montagna, C., 1997. "Strategic Trade Policy With Domestic Cost Asymmetries," Papers 97/27, College Dublin, Department of Political Economy-.
  4. Erling Holmøy andTorbjørn 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. [Downloadable!]
  5. Tor Jakob Klette and Astrid Mathiassen, 1995. "Job Creation, Job Destruction and Plant Turnover in Norwegian Manufacturing," Discussion Papers 136, Research Department of Statistics Norway.
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  6. Leahy, Dermot & Montagna, Catia, 1997. "Strategic Trade Policy When Firms Have Different Efficiency Levels," CEPR Discussion Papers 1549, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. 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)
    Other versions:
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