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Optimal policy against distortions caused by monopolistic competition and variable markup pricing

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  • Tadokoro, Atsushi

Abstract

This study investigates the optimal policy design against distortions under monopolistic competition with firm heterogeneity and variable markups. In this framework, distortions arise from differences in markups across firms, necessitating sophisticated policy interventions to eliminate all markup differences. This study shows that simultaneous implementation of ad valorem tax and per-unit subsidy works effectively in eliminating the markup differences, enabling efficient resource allocation without resorting to firm-specific taxes/subsidies, whose implementation would require each firm’s private information.

Suggested Citation

  • Tadokoro, Atsushi, 2024. "Optimal policy against distortions caused by monopolistic competition and variable markup pricing," Economics Letters, Elsevier, vol. 237(C).
    • Handle: RePEc:eee:ecolet:v:237:y:2024:i:c:s0165176524001101
    DOI: 10.1016/j.econlet.2024.111627
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    References listed on IDEAS

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    1. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    2. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2019. "Geography, competition, and optimal multilateral trade policy," Journal of International Economics, Elsevier, vol. 120(C), pages 145-161.
    3. Antonella Nocco & Gianmarco I. P. Ottaviano & Matteo Salto, 2014. "Monopolistic Competition and Optimum Product Selection," American Economic Review, American Economic Association, vol. 104(5), pages 304-309, May.
    4. Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Suedekum, 2020. "Quantifying the Gap Between Equilibrium and Optimum under Monopolistic Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2299-2360.
    5. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    6. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 561-644.
    7. Swati Dhingra & John Morrow, 2019. "Monopolistic Competition and Optimum Product Diversity under Firm Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 196-232.
    8. Kyle Bagwell & Seung Hoon Lee, 2023. "Monopolistic Competition and Efficiency under Firm Heterogeneity and Nonadditive Preferences," American Economic Journal: Microeconomics, American Economic Association, vol. 15(4), pages 208-267, November.
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    Cited by:

    1. Antonella Nocco & Gianmarco I. P. Ottaviano & Matteo Salto & Atsushi Tadokoro, 2024. "Leaving the global playing field through optimal non-discriminatory corporate taxes and subsidies," CEP Discussion Papers dp1992, Centre for Economic Performance, LSE.

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    More about this item

    Keywords

    Firm heterogeneity; Variable markups; Optimal policy; Efficiency; Misallocation; Monopolistic competition;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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