On monopolistic competition and optimal product diversity: workers ’ rents also matter
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 show 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 framework where wages are not controlled.
Year of publication: |
2008
|
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Authors: | Picard, Pierre M. ; Toulemonde, Eric |
Institutions: | Centre de Recherche en Économie Appliquée (CREA), Faculté de droit, d'économie et de finance |
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