Monopoly Power and Endogenous Product Variety: Distortions and Remedies

Florin Bilbiie, Fabio Ghironi and Marc Melitz

No 14383, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static—the misalignment between consumers and producers regarding the value of a new variety; and one dynamic—time variation in markups. Quantitatively, the welfare costs of the former are potentially very large relative to the latter. For a calibrated version of our model with these distortions, their total cost amounts to 2 percent of consumption. Appropriate taxation schemes can implement the optimum amount of entry and variety. Elastic labor introduces a further distortion that should be corrected by subsidizing labor at a rate equal to the markup for goods, in order to preserve profit margins and hence entry incentives.

JEL-codes: D42 H32 L16 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-com, nep-dge, nep-int and nep-mic
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

Published as Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2019. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," American Economic Journal: Macroeconomics, vol 11(4), pages 140-174.

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Related works:
Journal Article: Monopoly Power and Endogenous Product Variety: Distortions and Remedies (2019)
Working Paper: Monopoly Power and Endogenous Product Variety: Distortions and Remedies (2016)
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