On monopolistic competition and optimal product diversity: workers' rents also matter
(2009) Canadian Journal of Economics — Vol. 42, n° 4, p. 1347-1360 (2009)
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- Abstract
- (en) In the Dixit-Stiglitz model of monopolistic competition, entry of firms is socially too small. Other authors have shown that excess entry is also a possibility with other preferences for diversity. We sow that workers' rents also contribute to explain excess entry through a general equilibrium mechanism. Larger wages indeed raises the aggregate earnings and firms sales and profits, which entices too many firms to enter. We discuss the possibility of over-provision of varieties by comparing the equilibrium to unconstrained and constrained social optima and to other regulatory frameworks where wages are not controlled.
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Citations
Picard, P., & Toulemonde, E. (2009). On monopolistic competition and optimal product diversity: workers’ rents also matter. Canadian Journal of Economics, 42(4), 1347-1360. https://doi.org/10.1111/j.1540-5982.2009.01553.x (Original work published 2009)