Monopolistic Competition with Firm-Specific Costs

Catia Montagna

Oxford Economic Papers, 1995, vol. 47, issue 2, 318-28

Abstract: This paper extends a Dixit-Stiglitz model of monopolistic competition to allow for technical heterogeneity amongst firms. The dispersion of firms' technical efficiency within the industry is generated by a random process and is shown to lead to a steady-state spectrum of profits and market shares. Market structure is endogenously determined and the existence of efficiency gaps and the uncertainty faced by potential entrants are identified as the factor limiting rational entry. Thus, entry is shown not to eliminate long-run profits and, contrary to the homogeneous firms case and consistent with empirical findings, the model yields a positive relationship between concentration and profitability. Copyright 1995 by Royal Economic Society.

Date: 1995
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