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Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters

  • Nocco, Antonella
  • Ottaviano, Gianmarco
  • Salto, Matteo

After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9417.

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Date of creation: Apr 2013
Date of revision:
Handle: RePEc:cpr:ceprdp:9417
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  1. Kokovin, Sergey & Thisse, Jacques-François & Zhelobodko, Evgeny, 2010. "Monopolistic Competition: Beyond the CES," CEPR Discussion Papers 7947, C.E.P.R. Discussion Papers.
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  10. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  11. 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.
  12. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
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  14. Carole Maignan & Gianmarco Ottaviano & Dino Pinelli & Francesco Rullani, 2003. "Bio-Ecological Diversity vs. Socio-Economic Diversity: A Comparison of Existing Measures," Working Papers 2003.13, Fondazione Eni Enrico Mattei.
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