Monopolistic Competition and Optimal Product Diversity with Heterogeneous Firms

Volodymyr Lugovskyy

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: I extend the Dixit-Stiglitz (1977) model of monopolistic competition by relaxing the assumption of a single technology. The main objective is to study whether the equivalence of the monopolistically competitive equilibrium to the social optimum still holds in the extended model. I show that the answer crucially depends on the nature of the technological heterogeneity. If firms are free to choose technology, and free entry/exit condition holds to ensure a zero profit equilibrium, then the Dixit-Stiglitz result is robust to the existence of heterogeneous firms. However, if firm-level productivity is drawn from a heterogeneous distribution so that some infra-marginal firms earn positive profits then the market equilibrium no longer has the same desirable properties.

JEL-codes: D43 L1 L11 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2003
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:pur:prukra:1163

Access Statistics for this paper

More papers in Purdue University Economics Working Papers from Purdue University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Business PHD ().