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Monopolistic competition and optimum product selection: why and how heterogeneity matters

Nocco, Antonella and Ottaviano, Gianmarco I. P. and Salto, Matteo (2013) Monopolistic competition and optimum product selection: why and how heterogeneity matters. CEP Discussion Papers, CEPDP1206. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: CEPDP1206

Abstract

After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogeneous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2013 The Authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 08 Aug 2013 09:09
Last Modified: 08 Aug 2013 09:09
URI: http://eprints.lse.ac.uk/id/eprint/51541

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