On monopolistic competition and optimal product diversity: Workers' rents also matter

P.M. Picard, E. Toulemonde

Research output: Contribution to journalArticlepeer-review

Abstract

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 frameworks where wages are not controlled. © Canadian Economics Association.
Original languageEnglish
Pages (from-to)1347-1360
Number of pages14
JournalCanadian Journal of Economics
Volume42
DOIs
Publication statusPublished - 1 Nov 2009

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