Optimal policy against distortions caused by monopolistic competition and variable markup pricing

Atsushi Tadokoro

Economics Letters, 2024, vol. 237, issue C

Abstract: This study investigates the optimal policy design against distortions under monopolistic competition with firm heterogeneity and variable markups. In this framework, distortions arise from differences in markups across firms, necessitating sophisticated policy interventions to eliminate all markup differences. This study shows that simultaneous implementation of ad valorem tax and per-unit subsidy works effectively in eliminating the markup differences, enabling efficient resource allocation without resorting to firm-specific taxes/subsidies, whose implementation would require each firm’s private information.

Keywords: Firm heterogeneity; Variable markups; Optimal policy; Efficiency; Misallocation; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: D4 D6 H2 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:237:y:2024:i:c:s0165176524001101

DOI: 10.1016/j.econlet.2024.111627

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