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Quantifying the Gap between Equilibrium and Optimum Under Monopolistic Competition

Author

Listed:
  • Kristian Behrens

    (National Research University Higher School of Economics)

  • Giordano Mion

    (University of Sussex)

  • Yasusada Murata

    (National Research University Higher School of Economics)

  • Jens Suedekum

    (Heinrich-Heine-Universitat Dusseldorf)

Abstract

Equilibria and optima generally differ in imperfectly competitive markets. While this is well understood theoretically, it is unclear how large the welfare distortions are in the aggregate economy. Do they matter quantitatively? To answer this question, we develop a multi-sector monopolistic competition model with endogenous firm entry and selection, productivity, and markups. Using French and British data, we quantify the gap between the equilibrium and optimal allocations. In our preferred specification, inefficiencies in the labor allocation and entry between sectors, as well as inefficient selection and output per firm within sectors, generate welfare losses of about 6–10% of GDP.

Suggested Citation

  • Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Suedekum, 2018. "Quantifying the Gap between Equilibrium and Optimum Under Monopolistic Competition," HSE Working papers WP BRP 185/EC/2018, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:185/ec/2018
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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