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Product Differentiation, Fiscal Policy, and Free Entry

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  • Luís F. Costa

Abstract

Entry is recognized to be an important issue in macro models considering imperfectly competitive markets. However, two lines of research have been kept apart: the homogeneous-product oligopoly approach, where entry means more firms in the industry, and the monopolistic competition approach, where it means more brands. Our model tries to go beyond these limitations, considering a small open economy within a monetary union (characterised by a fixed exchange rate and perfect financial capital mobility). In this economy each industry produces a differentiated non-tradable good and is composed several Cournot competitors. Competition works at both the intraindustry and sector level. Decisions on both taxes and government expenditure are taken by the economy’s government, i.e., fiscal policy is decentralised within the monetary union. Since the model generates multiple equilibria, three types of entry are considered: more firms (I), more industries (II), and a combination of both (III). Fiscal policy is shown to be effective on aggregate output under the three cases. Its effect on welfare is mainly walrasian in case II, but it can be keynesian when market power is high in cases I or III.

Suggested Citation

  • Luís F. Costa, "undated". "Product Differentiation, Fiscal Policy, and Free Entry," Discussion Papers 98/20, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:98/20
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    1. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1997. "General Equilibrium Concepts under Imperfect Competition: A Cournotian Approach," Journal of Economic Theory, Elsevier, vol. 73(1), pages 199-230, March.
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    3. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 219-231, June.
    4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    6. Heijdra, Ben J & van der Ploeg, Frederick, 1996. "Keynesian Multipliers and the Cost of Public Funds under Monopolistic Competition," Economic Journal, Royal Economic Society, vol. 106(438), pages 1284-1296, September.
    7. Huw David Dixon & Michele Santoni, 1995. "An Imperfectly Competitive Open Economy with Sequential Bargaining in the Labour Market," Annals of Economics and Statistics, GENES, issue 37-38, pages 293-317.
    8. Richard Startz, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 737-752.
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    10. Dixon, Huw David & Rankin, Neil, 1994. "Imperfect Competition and Macroeconomics: A Survey," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 171-199, April.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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