TY  - JOUR
AU  - Bilbiie,Florin O.
AU  - Ghironi,Fabio
AU  - Melitz,Marc J.
TI  - Monopoly Power and Endogenous Product Variety: Distortions and Remedies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14383
PY  - 2008
Y2  - October 2008
UR  - http://www.nber.org/papers/w14383
L1  - http://www.nber.org/papers/w14383.pdf
N1  - Author contact info:
Florin O. Bilbiie
Université Paris 1 Panthéon-Sorbonne
Centre d’Economie de la Sorbonne
106/112 Boulevard de l'Hôpital
75647 Paris Cedex 13
France
E-Mail: florin.bilbiie@univ-paris1.fr

Fabio Ghironi
Boston College
Department of Economics
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3859
Tel: 617/552-3686
Fax: 617/552-2308
E-Mail: fabio.ghironi@bc.edu

Marc Melitz
Department of Economics
Harvard University
215 Littauer Center
Cambridge, MA 02138
E-Mail: mmelitz@harvard.edu
AB  - We study the efficiency properties of a dynamic, stochastic, general equilibrium, macroeconomic model with monopolistic competition and firm entry subject to sunk costs, a time-to-build lag, and exogenous risk of firm destruction. Under inelastic labor supply and linearity of production in labor, the market economy is efficient if and only if symmetric, homothetic preferences are of the C.E.S. form studied by Dixit and Stiglitz (1977). Otherwise, efficiency is restored by properly designed sales, entry, or asset trade subsidies (or taxes) that induce markup synchronization across time and states, and align the consumer surplus and profit destruction effects of firm entry. When labor supply is elastic, heterogeneity in markups across consumption and leisure introduces an additional distortion. Efficiency is then restored by subsidizing labor at a rate equal to the markup in the market for goods. Our results highlight the importance of preserving the optimal amount of monopoly profits in economies in which firm entry is costly. Inducing marginal cost pricing restores efficiency only when the required sales subsidies are financed with the optimal split of lump-sum taxation between households and firms.
ER  -