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Monopolistic competition and optimum product diversity under firm heterogeneity

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  • Morrow, John
  • Dhingra, Swati

Abstract

Empirical work has drawn attention to the high degree of productivity differences within industries and their role in resource allocation. This paper examines the allocational efficiency of such markets. Productivity differences introduce two new margins of potential inefficiency: selection of the right distribution of firms and allocation of the right quantities across firms. We show that these considerations affect welfare and policy analysis, and market power across firms leads to distortions in resource allocation. Demand-side elasticities determine how resources are misallocated and when increased competition from market expansion provides welfare gains.

Suggested Citation

  • Morrow, John & Dhingra, Swati, 2019. "Monopolistic competition and optimum product diversity under firm heterogeneity," LSE Research Online Documents on Economics 59226, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:59226
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    File URL: http://eprints.lse.ac.uk/59226/
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    Cited by:

    1. repec:cpr:ceprdp:14168 is not listed on IDEAS
    2. Alessia Campolmi & Harald Fadinger & Chiara Forlati, 2018. "Trade and Domestic Policies in Models with Monopolistic Competition," CRC TR 224 Discussion Paper Series crctr224_2018_049, University of Bonn and University of Mannheim, Germany.
    3. Gokan, Toshitaka & Kichko, Sergey & Thisse, Jacques-François, 2019. "How do trade and communication costs shape the spatial organization of firms?," Journal of Urban Economics, Elsevier, vol. 113(C).
    4. Mr�zov�, Monika & Neary, J Peter & Parenti, Mathieu, 2017. "Sales and Markup Dispersion: Theory and Empirics," CEPR Discussion Papers 12044, C.E.P.R. Discussion Papers.
    5. Monika Mrázová & J. Peter Neary, 2019. "IO for Export(s)," CESifo Working Paper Series 7966, CESifo Group Munich.
    6. repec:cpr:ceprdp:14133 is not listed on IDEAS
    7. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2019. "Geography, competition, and optimal multilateral trade policy," Journal of International Economics, Elsevier, vol. 120(C), pages 145-161.
    8. Sergey G. Kokovin & Shamil Sharapudinov & Alexander Tarasov & Philip Ushchev, 2020. "A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers," CESifo Working Paper Series 8082, CESifo Group Munich.

    More about this item

    Keywords

    efficiency; productivity; social welfare; demand elasticity; markups;

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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