Time Use and the Efficiency of Heterogeneous Markups
52 Pages Posted: 26 Jan 2024
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Time Use and the Efficiency of Heterogeneous Markups
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
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