NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monopoly Power and Endogenous Product Variety: Distortions and Remedies

Florin O. Bilbiie, Fabio Ghironi, Marc J. Melitz

NBER Working Paper No. 14383
Issued in October 2008, Revised in June 2016
NBER Program(s):EFG

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.

download in pdf format
   (399 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14383

Users who downloaded this paper also downloaded* these:
Bilbiie, Ghironi, and Melitz w13646 Endogenous Entry, Product Variety, and Business Cycles
Posner w0055 Social Costs of Monopoly and Regulation
Bilbiie, Ghironi, and Melitz w13199 Monetary Policy and Business Cycles with Endogenous Entry and Product Variety
Melitz w8881 The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity
Ghironi and Melitz w10540 International Trade and Macroeconomic Dynamics with Heterogeneous Firms
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us