Monopoly Power and Endogenous Product Variety: Distortions and Remedies

32 Pages Posted: 8 Oct 2008 Last revised: 26 Oct 2022

See all articles by Florin Bilbiie

Florin Bilbiie

Université Paris I Panthéon-Sorbonne

Fabio Pietro Ghironi

University of Washington

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2008

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.

Suggested Citation

Bilbiie, Florin O. and Ghironi, Fabio Pietro and Melitz, Marc J. and Melitz, Marc J., Monopoly Power and Endogenous Product Variety: Distortions and Remedies (October 2008). NBER Working Paper No. w14383, Available at SSRN: https://ssrn.com/abstract=1278456

Florin O. Bilbiie

Université Paris I Panthéon-Sorbonne ( email )

12 place du Panthéon
Paris, 75005
France

Fabio Pietro Ghironi

University of Washington ( email )

Department of Economics
Box 353330
Seattle, WA 98195-3330
United States
206-543-5795 (Phone)

HOME PAGE: http://faculty.washington.edu/ghiro

Marc J. Melitz (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8297 (Phone)
617-417-6536 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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