Monopolistic Competition Framework Research Articles

Exploring the ‘non-tariff measures black box’: Whose regulatory NTMs on which products improve the imported quality?

Regulatory non-tariff measures (NTMs), such as technical barriers to trade (TBTs) and sanitary and phytosanitary (SPS) measures, have frequently been imposed to regulate the importing market when the market fails to address some issues of concern regarding harmful products. The mechanism through which regulatory NTMs affect the quality of imported products seems like a ‘Black Box’, which is fully opened and analysed in this paper. Our research is built on a monopolistic competition framework, in which firms choose both the quality and the price of their exports subject to the compliance costs of NTMs and a fixed cost of technological change or bureaucratic procedures. The quality of products at the six-digit level of the Harmonised System (HS) traded globally and bilaterally during the period 1996–2017 is then estimated. Using these estimates, the impacts of TBTs and SPS measures on trade values, volume, unit value and quality are estimated. Then, by estimating the importer-specific impact of NTMs on trade indicators for each product, the NTM Black Box is opened and analysed.

Optimal income taxation under monopolistic competition

This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (Rev Econ Stud 38:175–208, 1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that quantity and variety distortions resulting from the market structure require adjustments to income tax policy, which also needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that in policy design the failure to account for the market structure results in a welfare loss of 1.77%. Motivated by practical cases, we study a policy regime that is solely based on income taxation. We show that departures from the social optimum can be compensated by lower and less regressive income taxes and a smaller government compared to the regime with income and commodity taxes. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.

How China's accession to the WTO affects global welfare?

Conventional wisdom suggests that, if a large nation reduces tariffs, the Rest of the World (RoW) as a whole should immediately experience gains from trade. However, little simulation evidence has been provided to evaluate the welfare effects of China's tariff reduction upon its WTO accession on each of its trade partners. This paper addresses the above issue under both the perfectly competitive model and the monopolistic competition framework à la Eaton and Kortum (2002) and Melitz (2003). Armed by the method of Dekle, Eaton, and Kortum (2007, 2008) to quantify the individual countries' responses to the “China (trade liberalization) shock” at equilibrium, we could check the extent to which global welfare benefit from the import tariff reduction after China's entry into the WTO. The quantitative results show that, both China and the RoW benefit from Chinese participation into the WTO, with estimated welfare gains falling in a range of [1.4697%, 3.8743%] and [0.0743%, 0.1015%], respectively. That is to say, about 58.24% of total benefits extracted from China's accession into the WTO worldwide flow to countries other than China under perfect competition; while under monopolistic competition, the whole world enjoys a 0.1571% welfare increases if firms' entry is restricted, of which 42.64% are injected into the RoW, an equivalent amount of 23.3903 billion US dollars. Since allowing for firms' entry and exit would lead to adjustments in both aggregate price indices and government tariff revenues, welfare gains of the world significantly increase (0.2474%), but these adjustments would slightly distort the welfare changes for other countries in the sense that only 36.50%, which is equivalent to 32.1008 billion US dollars, overflow to the RoW. As a result, some countries gain more, while some less.

Marketization，Community Networks in Labor Market and Resource Misallocation within Cities

The growth of aggregate TFP depends not only on technological progress but also on the optimal allocation of production factors. Hsieh and Klenow（2009）developed a monopolistic competition framework, and found out that there would exist large dispersion of firms’ TFPR when resources could not be reallocated from low-productivity plants to high-productivity plants due to price distortion. Using the data of Chinese manufacturing firms to estimate this model, they found that if the allocation efficiency of capital and labor in China was the same as in the US, aggregate TFP would be boosted by 30%–50%.Based on this groundbreaking paper, a large number of literatures have studied resource misallocation in China from the perspective of factor market distortions and government interventions, while little attention has been paid to the role of informal institution. However, community networks based on strong interpersonal ties such as kinship, geographical proximity, common educational or vocational experiences play an important role in the labor market, which have a profound effect on labor resource allocation. Traditionally, those networks are linked to nepotism, rent-seeking, corruption and market-segmentation. However, recent Development Economics views them as a supplement for market imperfection: People connected with strong ties can share recruiting information, and multilateral reputation can make commitments credible, which alleviates market failure such as adverse selection, moral hazard and incomplete contract.Zuo and Li（2017）estimated the city-level index of community networks, and examined its effect on firms’ TFP with various degrees of marketization, which to some extent involve resource misallocation within cities. However, we find that resource misallocation within cities may be more serious than inter-cities by decomposing all the variance of industry-level TFPR. And this paper gives it an explanation from the combination of community networks and marketization. The research shows that community networks mitigate resource misallocation in areas with low degree of marketization. However, in areas with high degree of marketization, community networks reduce the efficiency of resource allocation. By substituting the marketization index for its sub-indexes, the coefficient estimation is consistent with the theoretical hypothesis; and the heterogeneity test shows that these effects are more significant in industries with high barriers to entry and exit, capital-intensive industries and technology-intensive industries.The possible contributions of this paper are as follows: （1）The combination of community networks and marketization provides a new explanation for resource misallocation within cities in China.（2）New Institutional Economics emphasizes the interaction and common role of formal and informal institutions in the process of economic transformation and development. This paper studies the problem of resource misallocation in China from this perspective, which not only enriches the literature of resource misallocation, but also provides new evidence for the theory of Institutional Economics and Development Economics.

Optimal Income Taxation Under Monopolistic Competition

This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that price and variety distortions resulting from the market structure imply that income tax policy needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that, when choosing optimal tax policy, the failure to account for the market structure results in a welfare loss of 1:77 percent. Motivated by practical cases, we study a policy regime that is solely based on income taxation. Under this policy regime, departures from the social optimum can be compensated by lower and less regressive income taxes than those obtained under the regime with all forms of taxation. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.

Specific taxation, asymmetric costs, and endogenous quality

AbstractThis paper shows how a specific tax—in contrast to an ad valorem tax—alters industry structure and firm‐level performance in a monopolistic competition framework, where firms chose product quality endogenously and differ exogenously in productivity (i.e., marginal production efficiency). Industry equilibrium mechanisms and selection based on productivity play a significant role: A specific tax shifts market shares and profits toward firms with costs and prices above the industry average at the expense of low‐cost firms. This reallocation of market shares releases a novel scale effect such that low‐cost firms may quality downgrade, while high‐cost firms always quality upgrade. There exists a parameter subspace, where this combines to a decrease on average quality for the industry. In comparison: An ad valorem tax only reduces the number of firms/varieties in the industry due to demand absorption, but affects neither firm‐level performance nor industry structure.

Environmental certification programs: How does information provision compare with taxation?

AbstractThis paper develops a monopolistic competition framework to assess whether environmental certification programs can serve as effective substitutes for more traditional policy instruments such as environmental taxation or a minimum quality standard (MQS). I show that if firms can organize themselves and choose the certification standard collectively, then there is a beneficial role for a regulator to intervene. Also, the degree of substitution between differentiated goods that impose environmental damage and a “clean” outside good, the degree of competition in the industry and the extent of environmental damage caused by minimal quality goods are important considerations in the choice between a certification program and a tax or a MQS. While the comparison between a certification program and a tax depends on numerous factors, I find unequivocally that certification is a poor substitute for taxation whenever the outside good is a close substitute for differentiated goods, there is a high degree of competition in the industry or if minimal quality goods impose considerable environmental damage.

Quantifying the Determinants of the Intensive Margin of Trade

This paper decomposes within-industry differences in bilateral trade flows across countries into the contributions of (observed) trade costs and (unobserved) product appeal, production costs, and markups. To obtain empirical measures for unobserved characteristics, I estimate the structural parameters of a model of international trade that generalizes the benchmark CES monopolistic competition framework to allow for endogenous markups and variable marginal production costs. The empirical results show that, together, differences in product appeal and production costs account for about 95 percent of the cross-sectional variation in trade flows. The results also provide empirical support to the extended model: the largest varieties have estimated markups up to 12 percent higher than the industry average and the estimated output elasticities suggest supply curves are not perfectly elastic.

Regulatory Firm Size Distortions and the Buffering Effect of Outsourcing

There is a growing concern that size-contingent regulatory taxes are causing considerable mis-allocation of resources from large efficient firms to small inefficient firms, with significant implications for welfare and aggregate productivity. Using a monopolistic competition framework, I highlight outsourcing as a much neglected channel through which firms could potentially circumvent the regulation. Specifically, the regulated firms will outsource instead of downsizing to preserve their large scale of operation without assuming the extra tax burden. The reallocation of resources in this economy is mostly vertical, from downstream firms to suppliers, and much less top-down. A series of benchmark simulations show that ignoring this possibility leads to gross underestimation in the welfare effects of size-dependent regulations. The conclusions also make an argument for promoting outsourcing in tightly regulated economies.

The Role of FDI in Fostering Exports from the Host Country

In this paper, I propose a theoretical model analyzing the impact of FDI on exports from the host country. Using the framework of monopolistic competition with heterogenous firms, I show that the entry of highly efficient MNEs increases competition in the export market, which leads to crowding-out of domestic exporters. As a result, even though overall efficiency of the industry increases, exports by this industry may decrease.Further on, I add into my model a potential spillover effect that FDI can induce by lowering costs associated to export activities for all firms. I show that in such situation, the increased efficiency is more likely to outweigh the negative competition effect, resulting in larger exports from the host country.

International Prices and Endogenous Quality *

Abstract The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality subject to nonhomothetic demand. We estimate quality and quality-adjusted price indexes for 185 countries over 1984–2011. Our estimates are less sensitive to assumptions about the extensive margin of firms than are purely “demand-side” estimates. We find that quality-adjusted prices vary much less across countries than do unit values and, surprisingly, the quality-adjusted terms of trade are negatively related to countries’ level of income.

Monopolistic Product Line Competition with <i>Ex Post</i> Consumer Heterogeneity

We model monopolistic competition in product lines, assuming that consumer heterogeneity is the result rather than the cause of product variety. Our results contradict some well-known policy implications yielded by the standard monopolistic competition framework.

Costs of Low Productivity: Intensive and Extensive Margins

This paper discusses welfare costs of a decrease in productivity and argues that there are two important channels which cause a reduction in welfare: a decrease in output per firm (intensive margin) and a decrease in number of operating firms (extensive margin). Traditional Dixit-Stiglitz monopolistic competition framework with constant elasticity of substitution utility and common productivity across firms fail to capture the extensive margin. To address this problem, this paper introduces “continuum-quadratic” utility (i.e. linear demand system) while keeping the other assumptions unchanged and finds that lowering productivity affects not only the intensive but extensive margin as well.

TOURISM AND WELFARE-ENHANCING EXPORT SUBSIDIES*

This paper develops a new argument for an export subsidy in the context of Mode 2 services trade (consumption abroad). Tourists consume a bundle of goods and services. Their choice of destination depends on the overall cost of this bundle. Using a monopolistic competition framework, a pricing externality is identified—firms do not internalize the effects of their pricing decision on the overall inflow of tourists. The paper develops conditions under which an export subsidy is optimal. It also serves to illustrate how trade policy in the context of service trade may differ from that targeting goods trade.

Infrastructure regulation and reallocations within industry: Theory and evidence from Indian firms

Many firms in developing countries adopt captive power generators to deal with expensive and unreliable supply of electricity. I present a model that combines upstream regulation with downstream heterogeneous firms in a monopolistic competition framework, where firms can pay a fixed cost to adopt this marginal cost-reducing device. The presence of captive power affects the market equilibrium by increasing the level of idiosyncratic productivity a firm needs to survive in the market and by re-allocating sales and profits towards the more productive, adopting firms. Additionally, the rate of adoption is shown to increase with the price of electricity, industries' electricity–intensity and with higher barriers to firm entry. The mechanisms I propose are present for a cross-section of Indian firms.

Unemployment equilibrium and economic policy in mixed markets

This paper features a simple static Cournot–Nash model of an exchange economy with two productive sectors at flexible prices and wages. The traders in the atomless sector are price-takers, while the atoms behave strategically. We focus on the consequences of strategic interactions on the market outcome. Firstly, strategic interactions create underemployment on the labor market. Secondly, when the number of atoms increases without limit, the CWE coincides with the competitive equilibrium. Thirdly, we compare the welfare reached by traders at both equilibria. Fourthly, we consider the implementation of a tax levied on strategic supplies. Finally, we compare the approach retained with the monopolistic competition framework.

Trip Chaining: Who Wins Who Loses?

This paper studies how trip chaining (combining commuting and shopping or commuting and child care) affects market competition: in particular, pricing and the equilibrium number of firms as well as welfare. We use a monopolistic competition framework, where firms sell differentiated products as well as offering differentiated jobs to households, who are all located at some distance from the firms. The symmetric equilibriums with and without the option of trip chaining are compared. We show analytically that introducing the trip chaining option reduces the profit margin of the firms in the short run, but increases welfare. The welfare gains are, however, smaller than the transport cost savings. In the free‐entry long‐run equilibrium, the number of firms decreases but welfare is higher. A numerical illustration gives orders of magnitude of the different effects.

The Profit-Maximizing Firm as Exporter

This technical note provides a microeconomic framework of monopolistic competition to think about firms, and in particular, exporting firms. At the same time, the note discusses some of the stylized facts from the recent empirical literature that uses firm-level data.

The Profit-Maximizing Firm as Multinational Corporation

This note lays out a microeconomic framework of monopolistic competition to think about profit-maximizing firms that are vertical or horizontal multinationals.

Too much R&D? – vertical differentiation and monopolistic competition

Purpose – This paper aims to discuss whether product research and development (R&D) in developed economies tends to be too high compared with the socially desired level.Design/methodology/approach – In this context, a model of vertical and horizontal product differentiation within the Dixit‐Stiglitz framework of monopolistic competition is set up. Firms compete in horizontal attributes of their products, and also in quality that can be controlled by R&D investments.Findings – The paper reveals that in monopolistic‐competitive industries, R&D intensity is positively correlated with market concentration. Furthermore, welfare and policy analysis demonstrate an overinvestment in R&D with the result that vertical differentiation is too high and horizontal differentiation is too low. The only effective policy instrument in order to contain welfare losses is a price control of R&D services.Originality/value – Considering the extent of product R&D as well as the political efforts to promote public and private res...