We provide novel insights on the decentralization of optimal outcomes under monopolistic competition with non-separable utility, variable demand elasticity and endogenous firm heterogeneity. Relative to the uncostrained optimum, equilibrium firm selection is too weak, average firm size is too small, low-cost firms are too small and high-cost firms are too large. The unconstrained optimum can be decentralized through differentiated production subsidies to producers financed through lump-sum taxes on entrants and consumers. When differentiated subsidies and transfers from entrants are not viable, the constrained optimum can be decentralized through a common production subsidy financed by a lump-sum tax on consumers.
Monopolistic Competition and Optimum Product Selection
NOCCO, ANTONELLA;
2014-01-01
Abstract
We provide novel insights on the decentralization of optimal outcomes under monopolistic competition with non-separable utility, variable demand elasticity and endogenous firm heterogeneity. Relative to the uncostrained optimum, equilibrium firm selection is too weak, average firm size is too small, low-cost firms are too small and high-cost firms are too large. The unconstrained optimum can be decentralized through differentiated production subsidies to producers financed through lump-sum taxes on entrants and consumers. When differentiated subsidies and transfers from entrants are not viable, the constrained optimum can be decentralized through a common production subsidy financed by a lump-sum tax on consumers.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
