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Efficiency in large markets with firm heterogeneity

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  • Dhingra, Swati
  • Morrow, John

Abstract

Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. In a benchmark monopolistically competitive economy, productivity differences introduce two new margins for allocational inefficiency. When markups vary across firms, laissez faire markets do not select the right distribution of firms and the market-determined quantities are inefficient. We show that these considerations determine when increased competition from market expansion takes the economy closer to the socially efficient allocation of resources. As market size grow large, differences in market power across firms converge and the market allocation approaches the efficient allocation of an economy with constant markups.

Suggested Citation

  • Dhingra, Swati & Morrow, John, 2017. "Efficiency in large markets with firm heterogeneity," LSE Research Online Documents on Economics 85157, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:85157
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    Cited by:

    1. Bykadorov, Igor & Kokovin, Sergey, 2017. "Can a larger market foster R&D under monopolistic competition with variable mark-ups?," Research in Economics, Elsevier, vol. 71(4), pages 663-674.

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    More about this item

    Keywords

    Efficiency; Productivity; Limit theorem; Market expansion; Competition;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • F1 - International Economics - - Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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