Time Use and the Efficiency Of Heterogeneous Markups
36 Pages Posted: 15 Jan 2025
Abstract
What are the welfare implications of markup heterogeneity across firms? In standard monopolistic competition models, markup heterogeneity implies inefficiency even in the presence of free entry. We enrich the standard model so that preferences depend non-separably on off-market time and show how this changes the equilibrium and efficient distributions of productivity and markups. With constant elasticity of substitution across varieties, firm selection is inefficiently lax when off-market time and market goods are complements and inefficiently strict when they are substitutes. However, when off-market time and market goods are perfect complements, markups differ across firms and yet the equilibrium allocation is efficient.
Keywords: monopolistic competition, markups, efficiency, time use, selection, heterogeneous firms
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