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Monopolistic competition and optimum product selection: why and how heterogeneity matters

Antonella Nocco (), Gianmarco Ottaviano () and Matteo Salto

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 ine¢ ciency 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 heterogene-ity; selection; welfare (search for similar items in EconPapers)
JEL-codes: J1 L81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-upt
Date: 2017-07-20
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Published in Research in Economics, 20, July, 2017, 71(4), pp. 704-717. ISSN: 1090-9443

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Related works:
Journal Article: Monopolistic competition and optimum product selection: Why and how heterogeneity matters (2017) Downloads
Working Paper: Monopolistic Competition and Optimum Product Selection: Why and How Heterogeneity Matters (2013) Downloads
Working Paper: Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters (2013) Downloads
Working Paper: Monopolistic competition and optimum product selection: why and how heterogeneity matters (2013) Downloads
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