Monopolistic competition and optimum product selection: Why and how heterogeneity matters
Antonella Nocco (),
Gianmarco Ottaviano () and
Research in Economics, 2017, vol. 71, issue 4, 704-717
After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium is largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
Keywords: Monopolistic competition; Product diversity; Firm heterogeneity; Selection; Welfare (search for similar items in EconPapers)
JEL-codes: D4 D6 F1 L0 L1 (search for similar items in EconPapers)
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Working Paper: Monopolistic Competition and Optimum Product Selection: Why and How Heterogeneity Matters (2013)
Working Paper: Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters (2013)
Working Paper: Monopolistic competition and optimum product selection: why and how heterogeneity matters (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:71:y:2017:i:4:p:704-717
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