Monopoly Power and Endogenous Product Variety: Distortions and Remedies

Florin Bilbiie, Fabio Ghironi and Marc Melitz

No 11294, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static---the misalignment between consumers and producers regarding the value of a new variety; and one dynamic---time variation in markups. Quantitatively, the welfare costs of the former are potentially very large relative to the latter. For a calibrated version of our model with these distortions, their total cost amounts to 2 percent of consumption. Appropriate taxation schemes can implement the optimum amount of entry and variety. Elastic labor introduces a further distortion that should be corrected by subsidizing labor at a rate equal to the markup for goods, in order to preserve profit margins and hence entry incentives.

Keywords: Efficiency; Entry; Monopoly power; Product creation; Variety; Welfare costs; Optimal fiscal policy (search for similar items in EconPapers)
JEL-codes: D42 D50 E60 H21 H32 L16 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-com, nep-ind and nep-mac
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Monopoly Power and Endogenous Product Variety: Distortions and Remedies (2019)
Working Paper: Monopoly Power and Endogenous Product Variety: Distortions and Remedies (2008)
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