Citation

Discussion Paper Details

Please find the details for DP11294 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Monopoly Power and Endogenous Product Variety: Distortions and Remedies

Author(s): Florin Ovidiu Bilbiie, Fabio Ghironi and Marc J Melitz

Publication Date: May 2016

Keyword(s): efficiency, Entry, Monopoly power, Optimal fiscal policy, Product creation, Variety and Welfare costs

Programme Area(s): Macroeconomics and Growth and Public Economics

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. 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11294

Bibliographic Reference

Bilbiie, F, Ghironi, F and Melitz, M. 2016. 'Monopoly Power and Endogenous Product Variety: Distortions and Remedies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11294