The impact of integration on productivity and welfare distortions under monopolistic competition

Dhingra, Swati ORCID: 0000-0001-5468-3415 and Morrow, John (2012) The impact of integration on productivity and welfare distortions under monopolistic competition. CEP Discussion Papers (CEPDP1130). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

A fundamental question in monopolistic competition theory is whether the market allocates resources efficiently. This paper generalizes the Spence-Dixit-Stiglitz framework to heterogeneous firms, addressing when the market provides optimal quantities, variety and productivity. Under constant elasticity demand, each firm prices above its average cost, yet we show market allocations are efficient. When demand elasticities vary, market allocations are not efficient and reflect the distortions of imperfect competition. After determining the nature of market distortions, we investigate how integration may serve as a remedy to imperfect competition. Both market distortions and the impact of integration depend on two demand side elasticities, and we suggest richer demand structures to pin down these elasticities. We also show that integration eliminates distortions, provided the post-integration market is sufficiently large.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2012 The Author(s)
Divisions:	Economics Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	F - International Economics > F1 - Trade L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance D - Microeconomics > D6 - Welfare Economics
Date Deposited:	26 Feb 2024 15:36
Last Modified:	11 Dec 2024 19:53
URI:	http://eprints.lse.ac.uk/id/eprint/121764

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