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. When production factors (labor and physical capital) are elastic and traded in competitive markets, further distortions appear. Appropriate taxation schemes can restore optimality if they preserve entry incentives. Quantitatively, the welfare costs of each distortion by itself amounts to 2 to 5 percent of consumption. But their overall cost when jointly present is greatly magnified, and generates up to a 25 percent welfare loss.
Bilbiie, Florin O., Fabio Ghironi, and Marc J. Melitz.
"Monopoly Power and Endogenous Product Variety: Distortions and Remedies."
American Economic Journal: Macroeconomics,
Firm Behavior: Theory
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
Taxation and Subsidies: Efficiency; Optimal Taxation
Business Taxes and Subsidies including sales and value-added (VAT)
Fiscal Policies and Behavior of Economic Agents: Firm
Oligopoly and Other Imperfect Markets