A Competitive Model of (Super)Stars

Tim Perri ()

No 04-09, Working Papers from Department of Economics, Appalachian State University

Abstract: The usual explanations for superstar effects---when a firm’s revenue is positive and convex in quality, and a few firms earn a large share of market revenue---are imperfect substitution between sellers, low marginal cost of output, and marginal cost declining as quality increases. Herein, a competitive model is developed in which superstar effects occur simply because a few firms have quality significantly higher than others. No firm needs to sell more than a small percentage of market output, and cost can increase in output and in quality (the latter possibly at no more than a decreasing rate).

Date: 2004, Revised 2005
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