Monopolistic competition and optimum product selection: Why and how heterogeneity matters

How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use `disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.

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“…These two expressions can be combined with (53) and (23) to obtain the locally e¢ cient number of varieties designed…”

Section: Product Rangementioning

confidence: 99%

Geography, Competition, and Optimal Multilateral Trade Policy

Nocco

¹

,

Ottaviano

²

,

Salto

³

2019

SSRN Journal

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How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use `disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.

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“…It is generally agreed that the work of Alonso (1964) has played the role of the key model in the development of neoclassical urban economics. There is a large number of research papers which extend and generalize the Alonso model (Imai, 1982;Fujita and Thisse, 2002;Berliant et al, 2002;Forslid and Ottaviano, 2003;Robert-Nicound, 2005;Nocco, et. al., 2017;and Fosgerau, 2018).…”

Section: Introductionmentioning

confidence: 99%

Growth and Residential Distribution with Solow, Alonso, and Dixit-Stiglitz Integrated

Zhang

¹

2020

GSSR

0

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The purpose of this study is to deal with dynamic interdependence between economic growth, economic structure, and residential distribution. It develops a spatial dynamic economic model on basis of microeconomic foundation. It integrates the economic mechanisms of the Solow one-sector growth model, the Alonso spatial residential model, and the Dixit-Stiglitz equilibrium model with imperfect market. We apply neoclassical economic growth of perfect competition to describe the growth determinant, the neoclassical urban residential model to determine residential location, and the basic model of new growth theory with imperfect market to take account of perfect and imperfect competition in spatial equilibrium structure. The basic economic mechanisms of the three approaches are integrated by using Zhang new approach to formally model household behavior. We determine the motion by simulation. Then we conduct comparative dynamic analysis to analyze how exogenous changes in different parameters affect residential distribution, economic growth, and economic structure. The study shows how changes in preferences and technologies affect economic growth, economic structure, land rent, and residential distribution.

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Monopolistic competition and optimum product selection: Why and how heterogeneity matters

Cited by 16 publications

References 28 publications

Geography, competition, and optimal multilateral trade policy

Geography, competition, and optimal multilateral trade policy

Geography, Competition, and Optimal Multilateral Trade Policy

Growth and Residential Distribution with Solow, Alonso, and Dixit-Stiglitz Integrated

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