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Monopoly Power and Endogenous Product Variety: Distortions and Remedies

Author

Listed:
  • Florin O. Bilbiie
  • Fabio Ghironi
  • Marc J. Melitz

Abstract

The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static—the misalignment between consumers and producers regarding the value of a new variety; and one dynamic—time variation in markups. When production factors (labor and physical capital) are elastic and traded in competitive markets, further distortions appear. Appropriate taxation schemes can restore optimality if they preserve entry incentives. Quantitatively, the welfare costs of each distortion by itself amounts to 2 to 5 percent of consumption. But their overall cost when jointly present is greatly magnified, and generates up to a 25 percent welfare loss.

Suggested Citation

  • Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2019. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 140-174, October.
    • Handle: RePEc:aea:aejmac:v:11:y:2019:i:4:p:140-74
    Note: DOI: 10.1257/mac.20170303
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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