Monopolistic Competition and Optimum Product Selection: Why and How Heterogeneity Matters

Antonella Nocco, Gianmarco Ottaviano and Matteo Salto

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: 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 seems to be largest when selection among heterogeneous 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; heterogeneity; selection; welfare (search for similar items in EconPapers)
JEL-codes: D4 D6 F1 L0 L1 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-bec, nep-com, nep-cwa, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://cep.lse.ac.uk/pubs/download/dp1206.pdf (application/pdf)

Related works:
Journal Article: Monopolistic competition and optimum product selection: Why and how heterogeneity matters (2017)
Working Paper: Monopolistic competition and optimum product selection: why and how heterogeneity matters (2017)
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1206

Access Statistics for this paper

More papers in CEP Discussion Papers from Centre for Economic Performance, LSE
Bibliographic data for series maintained by ().