On monopolistic competition and optimal product diversity: workers' rents also matter

Pierre Picard and Eric Toulemonde

Canadian Journal of Economics, 2009, vol. 42, issue 4, 1347-1360

Abstract: In the Dixit-Stiglitz model of monopolistic competition, entry of firms is socially too small. Other authors have shown that excess entry is also a possibility with other preferences for diversity. We show that workers' rents also contribute to explain excess entry through a general equilibrium mechanism. Larger wages indeed raises the aggregate earnings and firms sales and profits, which entices too many firms to enter. We discuss the possibility of over-provision of varieties by comparing the equilibrium to unconstrained and constrained social optima and to other regulatory frameworks where wages are not controlled.

JEL-codes: L16 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (5)

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Working Paper: On monopolistic competition and optimal product diversity: workers ’ rents also matter (2008)
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