Time Use and the Efficiency of Heterogeneous Markups

A recent literature has provided empirical evidence that markups are increasing and are heterogeneous across firms. In standard monopolistic competition models, such heterogeneity implies inefficiency even in the presence of free entry. We enrich the standard model of monopolistic competition with heterogeneous firms to incorporate off-market time use that is non-separable with market consumption into the consumer problem. Within this framework the constancy of equilibrium markups is neither sufficient nor necessary for efficiency. Whether or not the competitive level of production and market concentration of firms are efficient depends on the degree to which consumption time and market goods are complements or substitutes. Such inefficiencies are the result of time use being misallocated toward home production at the expense of market production.