IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/17092.html

Selection and Sorting of Heterogeneous Firms through Competitive Pressures

Author

Listed:
  • Matsuyama, Kiminori
  • Ushchev, Philip

Abstract

We apply the H.S.A. (Homotheticity with a Single Aggregator) class of demand systems to the Melitz (2003) model of monopolistic competition with firm heterogeneity. H.S.A., which contains CES and translog as special cases, is tractable due to its homotheticity and to its single aggregator that serves as a sufficient statistic for competitive pressures. It is also flexible enough to allow for the choke price, the 2nd and 3rd laws of demand. We prove the existence and uniqueness of the free-entry equilibrium and conduct general equilibrium comparative static analysis with sharp analytical results, often just by using simple diagrams. Because the single aggregator enters all firm-specific variables proportionately with the firm-specific marginal cost, thereby acting as a magnifier of firm heterogeneity, we are able to characterize how a change in competitive pressures, whether due to a change in the entry cost, market size, or in the overhead cost, causes reallocation across firms and selection and sorting of firms across markets, thereby affecting the distribution of firm-specific variables. Furthermore, we are able to show that, due to such a composition effect, the average markup (pass-through) rate may move in the opposite direction of the firm-level markup (pass-through) rate, which means that the average markup rate and the aggregate profit share may go up due to (not in spite of) more competitive pressures.

Suggested Citation

  • Matsuyama, Kiminori & Ushchev, Philip, 2022. "Selection and Sorting of Heterogeneous Firms through Competitive Pressures," CEPR Discussion Papers 17092, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17092
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP17092
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. Egger, Peter H. & Huang, Ruobing, 2025. "Market versus optimum allocation in open economies," Journal of Economic Theory, Elsevier, vol. 228(C).
    3. Matsuyama, Kiminori & Ushchev, Philip, 2022. "Destabilizing effects of market size in the dynamics of innovation," Journal of Economic Theory, Elsevier, vol. 200(C).
    4. Samuel Vika Mhlanga, 2023. "Productivity and reallocation under monopolistic competition: A Micro panel data analysis," South African Journal of Economics, Economic Society of South Africa, vol. 91(4), pages 466-497, December.
    5. Sergey Kokovin & Alina Ozhegova & Shamil Sharapudinov & Alexander Tarasov & Philip Ushchev, 2024. "A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers," American Economic Journal: Microeconomics, American Economic Association, vol. 16(2), pages 354-384, May.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:17092. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.