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Market structure and welfare under monopolistic competition

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  • Sá, Nelson

Abstract

This paper analyzes the relationship between market structure and welfare by developing a model of monopolistic competition in which exogenous entry costs and endogenous differentiation costs determine market concentration and market power. A non-monotonic link is identified between these costs and welfare under a decentralized equilibrium. These results detail new reasons why simple market concentration indicators are a misleading statistic for welfare evaluations.

Suggested Citation

  • Sá, Nelson, 2015. "Market structure and welfare under monopolistic competition," Economics Letters, Elsevier, vol. 132(C), pages 69-72.
    • Handle: RePEc:eee:ecolet:v:132:y:2015:i:c:p:69-72
    DOI: 10.1016/j.econlet.2015.04.018
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    References listed on IDEAS

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    1. Friedel Bolle, 2011. "Over- and under-investment according to different benchmarks," Journal of Economics, Springer, vol. 104(3), pages 219-238, November.
    2. Di Comite, Francesco & Thisse, Jacques-François & Vandenbussche, Hylke, 2014. "Verti-zontal differentiation in export markets," Journal of International Economics, Elsevier, vol. 93(1), pages 50-66.
    3. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    5. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    6. Pietro Peretto & Michelle Connolly, 2007. "The Manhattan Metaphor," Journal of Economic Growth, Springer, vol. 12(4), pages 329-350, December.
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    Cited by:

    1. Alexander Osharin & Valery Verbus, 2018. "Heterogeneity of consumer preferences and trade patterns in a monopolistically competitive setting," Journal of Economics, Springer, vol. 125(3), pages 211-237, November.

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    More about this item

    Keywords

    Sunk costs; Monopolistic competition; Welfare;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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