Monopolistic Competition and Efficiency under Firm Heterogeneity and Nonadditive Preferences
American Economic Journal: Microeconomics
vol. 15,
no. 4, November 2023
(pp. 208-67)
Abstract
We consider the single-sector version of the Melitz-Ottaviano model of monopolistic competition with heterogeneous firms. We characterize the first-best and market allocations. We find that the market provides the first-best level of entry but too little selection; hence, the market provides too many varieties and too little aggregate quantity, and allocates too little (much) production to low (high) cost realizations. Allowing for a broad family of quantity allocation functions, we establish sufficient conditions for the global optimality of the first-best solution. Several important extensions are also examined.Citation
Bagwell, Kyle, and Seung Hoon Lee. 2023. "Monopolistic Competition and Efficiency under Firm Heterogeneity and Nonadditive Preferences." American Economic Journal: Microeconomics, 15 (4): 208-67. DOI: 10.1257/mic.20210099Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D50 General Equilibrium and Disequilibrium: General
- D60 Welfare Economics: General
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