Time Use and the Efficiency of Heterogeneous Markups

52 Pages Posted: 26 Jan 2024

See all articles by Brian C. Albrecht

Brian C. Albrecht

International Center for Law & Economics (ICLE)

Thomas Phelan

Federal Reserve Bank of Cleveland

Nick Pretnar

Carnegie Mellon University - David A. Tepper School of Business

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Abstract

What are the welfare implications of markup heterogeneity across firms? In standard monopolistic competition models, such heterogeneity implies inefficiency even in the presence of free entry. We enrich the standard model with heterogeneous firms so that preferences are non-separable in off-market time and market consumption and show that homogeneity of markups is now neither necessary nor sufficient for efficiency. The marginal cost of the marginal firm is weakly inefficiently high when off-market time and market consumption are complements and inefficiently low when they are substitutes, and the equilibrium allocation devotes weakly too few resources to firm creation. However, when off-market time and market consumption are perfect complements, markups are heterogeneous across firms and yet the equilibrium allocation is efficient.

Keywords: monopolistic competition, markups, efficiency, time use, home production, selection

Suggested Citation

Albrecht, Brian C. and Phelan, Thomas and Pretnar, Nicholas, Time Use and the Efficiency of Heterogeneous Markups. Available at SSRN: https://ssrn.com/abstract=4707099 or http://dx.doi.org/10.2139/ssrn.4707099

Brian C. Albrecht

International Center for Law & Economics (ICLE) ( email )

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Thomas Phelan

Federal Reserve Bank of Cleveland ( email )

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Cleveland, OH 44101-1387
United States

HOME PAGE: http://https://www.clevelandfed.org/our-research/economists/tom-phelan.aspx

Nicholas Pretnar (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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