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On the Use of Substitutability as a Measure of Competition

Author

Listed:
  • Koeniger Winfried

    (IZA, University of Bonn)

  • Licandro Omar

    (European University Institute, FEDEA)

Abstract

In the recent macro literature the effect of competition has been analyzed by comparing economies with the same market structure but different degrees of substitutability. In this note, we argue that this approach may mingle the price effect of competition with a pure allocation effect. To illustrate the limitations of using the elasticity of substitution as a measure of competition, we present an example in which changes in the elasticity alter equilibrium allocations, but changes in the degree of market power do not. We use a simple static general equilibrium model in which sectors have different productivity. Then, higher substitutability always shifts resources towards the more productive sectors. Instead, changes in the market structure (monopolistic competition versus Bertrand duopoly) do not affect the relative price of consumption goods if the markups are symmetric, implying that the induced changes in competition do not have any price effect on equilibrium allocations.

Suggested Citation

  • Koeniger Winfried & Licandro Omar, 2006. "On the Use of Substitutability as a Measure of Competition," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-9, March.
    • Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:1:n:2
    DOI: 10.2202/1534-5998.1283
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    Citations

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    Cited by:

    1. Navas Antonio & Licandro Omar, 2011. "Trade Liberalization, Competition and Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-28, May.
    2. Epifani, Paolo & Gancia, Gino, 2011. "Trade, markup heterogeneity and misallocations," Journal of International Economics, Elsevier, vol. 83(1), pages 1-13, January.
    3. Daria Onori, 2015. "Competition and Growth: Reinterpreting their Relationship," Manchester School, University of Manchester, vol. 83(4), pages 398-422, July.
    4. Bucci, Alberto & Parello, Carmelo Pierpaolo, 2009. "Horizontal innovation-based growth and product market competition," Economic Modelling, Elsevier, vol. 26(1), pages 213-221, January.
    5. Boyan Jovanovic, 2009. "When should firms invest in old capital?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 107-123, March.
    6. Bambi, Mauro & Gozzi, Fausto & Licandro, Omar, 2014. "Endogenous growth and wave-like business fluctuations," Journal of Economic Theory, Elsevier, vol. 154(C), pages 68-111.
    7. Kemnitz, Alexander & Knoblach, Michael, 2020. "Endogenous sigma-augmenting technological change: An R&D-based approach," CEPIE Working Papers 02/20, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    8. Sara Amoroso & Peter M. Kort & Bertrand Melenberg & Joseph Plasmans & Mark Vancauteren, 2010. "Firm Level Productivity under Imperfect Competition in Output and Labor Markets," CESifo Working Paper Series 3082, CESifo.
    9. Navas, Antonio, 2010. "La Apertura al Comercio Exterior y sus Efectos sobre la Productividad en Presencia de Diferencias Intersectoriales," Working Papers in Economic Theory 2010/04, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    10. 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.
    11. Chu, Yongqiang, 2012. "Optimal capital structure, bargaining, and the supplier market structure," Journal of Financial Economics, Elsevier, vol. 106(2), pages 411-426.

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