Monopoly Power and Endogenous Product Variety: Distortions and Remedies

Florin Bilbiie, Fabio Ghironi and Marc Melitz

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 4, 140-74

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. When production factors (labor and physical capital) are elastic and traded in competitive markets, further distortions appear. Appropriate taxation schemes can restore optimality if they preserve entry incentives. Quantitatively, the welfare costs of each distortion by itself amounts to 2 to 5 percent of consumption. But their overall cost when jointly present is greatly magnified, and generates up to a 25 percent welfare loss.

JEL-codes: D21 D43 H21 H25 H32 L13 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20170303
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Citations: View citations in EconPapers (53)

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Related works:
Working Paper: Monopoly Power and Endogenous Product Variety: Distortions and Remedies (2016)
Working Paper: Monopoly Power and Endogenous Product Variety: Distortions and Remedies (2008)
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