Monopoly Power and Endogenous Product Variety: Distortions and Remedies
- (pp. 140-74)
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. 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.Citation
Bilbiie, Florin O., Fabio Ghironi, and Marc J. Melitz. 2019. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies." American Economic Journal: Macroeconomics, 11 (4): 140-74. DOI: 10.1257/mac.20170303Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H32 Fiscal Policies and Behavior of Economic Agents: Firm
- L13 Oligopoly and Other Imperfect Markets
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