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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.

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  • 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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    More about this item

    Keywords

    efficiency; productivity; social welfare; demand elasticity; markups;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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