Monopolistic Competition Model Research Articles

Power shortage and firm productivity: Evidence from the World Bank Enterprise Survey

This paper extends a standard model of monopolistic competition with heterogeneous firms and incorporates energy as intermediate input. The effect of energy shortage on firm productivity is illustrated theoretically and examined empirically. Our reasoning contributes to the understanding of the mechanism by which energy shortage affects the productivity of enterprises. The empirical analysis is based on the World Bank's global enterprise survey dataset for 119 countries over the period 2007-2017. Our empirical results indicate that: (i) power shortage imposes a significant negative impact on firm total factor productivity (TFP); (ii) power shortage reduce firm TFP by jeopardizing skilled workers' productive activities; (iii) TFP of private enterprises is vulnerable to power shortage; (iv) and productivities for the firms located in low- and middle-income countries are sensitive to power shortage. The empirical results also shed light on TFP-enhancing energy policy formation. The government should provide a stable supply of energy and power shortage relief measures to ensure economic development. Since private firms in low and middle-income countries are most vulnerable to power shortages, the energy policy formulated by the governments of these countries should be tilted towards their private entities.

Modeling the Interface Between the Social Geosystem and the Environment

Abstract. This article deals with the context of a new rationality in modeling due to the climate agenda and the introduction of ESG-type principles. We studied a geosystem with homogeneous ecosystems that have a similar geological basement, relief mesoforms, and industrial-territorial complexes. They function in a unified institutional climate. In this case, the focus was on the mesoscale of the systems. The institutional order was based on the relationship between private and general institutions, and organizational features of regions. The Dixit-Stiglitz monopolistic competition model was used to account for financial performance and utility in an equilibrium industry with high nature intensity. What was new was the introduction of the concept of social brands associated with ecosystem services and used simultaneously to account for the utility and customization of the new economic order, as well as the introduction of a social discount rate (a discount factor). Social brands create a certain ‘green’ meaningful context in relation to natural capital and acting brands through social platforms. Thus, the society, through the mechanism of social brands, is offered a new format of interactions in which the structure of social brands becomes a priority in relation to the productive structure of the economy.
 Keywords: climate agenda, natural and social geosystems, utility, social discount, social brand

Import liberalization and export product mix

AbstractThis paper develops a monopolistic competition model of multi‐product firms to explain the effect of trade liberalization on the product mix of multi‐product exporting firms. The model shows that input‐tariff reduction leads to increases in a firm's export values, especially for products that are farther from a firm's core competency. To test the theoretical predictions, we use the merged data built upon the highly disaggregated Chinese firm‐level production data and customs data for 2000–2006. Consistent with the theory, the positive impact of input trade liberalization on export value is found to be more pronounced for peripheral products, and input‐tariff reduction also expands a firm's product scope, affecting firm's average productivity.

The Impact of Trade Competition on Managerial Incentives and Productivity

We study a model of monopolistic competition with firm heterogeneity –in terms of productivity- in which firms provide incentives to managers to reduce marginal cost. In our model managerial incentives are endogenously determined by firm’s productivity and the intensity of competition. We show how tougher competition, generated by large market size or trade, induces stronger incentives to reduce marginal cost for the more-productive firms while the opposite holds for the less-productive firms; this further affects the selection of heterogeneous producers into the domestic and foreign markets. Aggregate productivity growth is decomposed in two sources, within-firm growth and between-firm growth, a decomposition that has not been theoretically analyzed before. We provide a useful theoretical model to analyze how exposure to competition leads to firm productivity growth and how this further affects aggregate performance measures and selection.

Fading Choice: Transport Costs and Variety in Consumer Goods

The lack of market development in remote areas is usually measured by spatial variation in prices for a given set of consumer goods. We focus instead on the way distance constrains the choices consumers can make. We construct a model of monopolistic competition between traders moving goods from market towns to rural areas. An increase in transport costs reduces consumer welfare not only through lower incomes for farm households and higher prices for manufactures but also through reduced availability of manufactures: choice fades with distance. The model allows for heterogeneity of villages in terms of market size and the distribution of income. We test the model using data from a purpose-designed survey of shops and consumers in rural villages in Ethiopia. Falling transport costs, larger market size and higher inequality dramatically raise variety of items and brands available locally. We use data on prices of matched source and destination goods to estimate similar tastes for variety across space and estimate an average markup of 10-15 percent. We use these results to estimate the welfare costs of falling variety at between 5-7 percent of expenditures on manufactured consumer goods. Our results suggest ignoring the costs of lower variety in remote places will mean that the level of poverty is underestimated while the rate at which poverty declines is underestimated as well.

Review of monopoly models and implications for antitrust

In February 2021, the Ministry of Commerce Anti-monopoly Bureau of the People’s Republic of China released the Antitrust Guidelines for the Platform Economy Industry. This announcement signaled more governmental supervision and governance with Internet-related business. In practice, tech giants have been suffering administrative penalties one after another. This study presents a review and analysis of the research literature on the monopoly quantitative models, outlining the components and concluding the implications for anti-monopoly. This paper delineates three main research topics relating to the monopoly models within the literature: the oligopoly, monopolistic competition, and Internet platform monopoly. The Cournot model, Bertrand model, Stackelberg model, and Innovational model represent the oligopoly studies when a small group of large sellers dominates the market. We then discuss the monopolistic competition models as the Krugman model, D-S Model, and Lancaster Model. We pay particular attention to the platform economy to reflect the new era of monopoly with Marshall’s Dilemma. After the summary and comparison of the literature research trajectory, our analysis culminates in implications for antitrust: why Internet corporations and government meet this monopoly predicament, who are involved by monopoly policy, how consumers and market got impacted, and what countermeasures could be taken to improve the antitrust. This study contributes to overview the development of monopoly models and critically analyze based on the current antitrust situation and trend of platform economy integration. We should scrutinize the feasibility to adopt engrain view of monopoly mechanisms as benefit loss on the information technology economy. Therefore, this research raises the novel question and synergistic effects of monopoly.

Hiding Filthy Lucre in Plain Sight:Theory and Identification of Business-Based Money Laundering

Proceeds from illicit activities percolate into the legal economy through several channels. We exploit international regulations targeting money laundering via the financial sector to identify the flows of “dirty money” into legitimate establishments: business-based money laundering (BBML). Our variant of the monopolistic competition model embeds a drug cartel that channels illicit proceeds into an offshore financial investment and into BBML. Tighter regulations in one channel increase the flow in the other. We use a research design that links U.S. county business activity to the evolution of anti-money-laundering regulations in Caribbean jurisdictions to provide the first empirical evidence of the phenomenon.

Market interaction structure and equilibrium price heterogeneity in monopolistic competition

This paper investigates the extent to which the structure of the interaction network between suppliers and buyers affects equilibrium price heterogeneity. An incomplete interaction structure leads to uneven information flows and different information bases for consumers which is then taken into account by price setting producers. This results in heterogenous prices even if producers are identical in all other respects. The complete interaction network serves as a special case resembling standard monopolistic competition models. We show that a slight deviation from the complete network results in heterogeneous prices, although this heterogeneity becomes economically significant only under sparse or small networks. Sparsity as the main determinant of price heterogeneity dominates network asymmetry: relatively dense networks show minimal price dispersion even if its degree distribution follows a power law.

Sectoral inflation persistence, market concentration, and imperfect common knowledge

Previous studies have stressed that inflation dynamics exhibit substantial dispersion across sectors. Using US producer price data, we present evidence that sectoral inflation persistence is negatively correlated with market concentration, which is difficult to reconcile with the prediction of the standard model of monopolistic competition. To better explain the data, we incorporate imperfect common knowledge into the monopolistic competition model introduced by Melitz and Ottaviano (2008). In the model, pricing complementarity among firms increases as market concentration decreases. Because higher pricing complementarity generates greater inflation persistence, our model successfully replicates the observed negative correlation between inflation persistence and market concentration across sectors.

Market power and journalistic quality

The political news media play an important role in the successful working of democratic societies. In order to fulfill this role, a sufficient level of journalistic quality is required. Most Western societies rely on the market as means to assure this level of quality. This implies regulation of the media sector by competition law, which may take different attitudes towards market power. While it is undisputed that some aspects of competition between political news media firms yield beneficial social outcomes, empirical findings regarding the impact of changes in market power are less straightforward. In the present analysis, I aim to understand whether an increase in market power may lead to an increase in journalistic quality. To this end,I formally model a demand function for media outlets based on the empirically justified assumption that preferences for journalistic quality systematically differ among consumers according to their education. I refer to this finding as consumption capital in a wide sense. Using a model of monopolistic competition, I find that, if consumption capital is sufficiently high, an increase in market power is associated with an increase in journalistic quality.

Trade liberalization with granular firms

Relying on rich firm-product Danish data, we document that the bulk of manufacturing revenue comes from industries where large firms and numerous insignificant firms coexist. Given the importance of this market structure in the aggregate, we study its implications for gains of trade by embedding a set of oligopolistic firms into a monopolistic-competition model. In this setting, the idiosyncratic features of large firms become crucial for gains of trade, given the granular importance of their profits for aggregate income. In particular, gains of trade are negatively affected when a large firm has a pronounced home bias, since trade liberalization reduces its profit by increasing domestic competition. A calibration for Denmark reflects this feature: trade liberalization raises the profits of almost all large firms, but the fall in profit of one large firm almost completely offsets the gains in income from the profit channel.

Sectoral Inflation Persistence, Market Concentration and Imperfect Common Knowledge

Previous studies have stressed that inflation dynamics exhibit substantial dispersion across sectors. Using US producer price data, we present evidence that sectoral inflation persistence is negatively correlated with market concentration, which is difficult to reconcile with the prediction of the standard model of monopolistic competition. To better explain the data, we incorporate imperfect common knowledge into the monopolistic competition model introduced by Melitz and Ottaviano (2008). In the model, pricing complementarity among firms increases as market concentration decreases. Because higher pricing complementarity generates greater inflation persistence, our model successfully replicates the observed negative correlation between inflation persistence and market concentration across sectors.

Continuous spatial monopolistic competition: matching goods with consumers

Our novel approach enriches the general additive monopolistic competition model with a space of product characteristics: consumers’ “ideal varieties”. This paper bridges two traditions in modelling markets with horizontal product differentiation: the Hotelling’s (Econ J 39(153):41–57, 1929) “address economy” and Chamberlinian Dixit–Stiglitz monopolistic competition. Unlike Hotelling, our partially localised competition involves intersecting zones of service among producers. When population grows, increasing/decreasing elasticity of elementary utility governs increasing/decreasing prices. Increasing market size induces an increase in the firm density, but with the presence of transport cost, the firm’s range of service decreases, consumers concentrate their consumption closer to their ideals, and there are savings in transport costs. Thereby, finer matching among buyers/sellers becomes the important welfare benefit from a thicker market. That is, our model sets a finer matching of goods to tastes as a new source of gains rather than variety being the only reason for gains. Free entry remains socially excessive, under natural preferences.

GLOBALIZATION, TECHNOLOGY DISCREPANCY AND SPECIALIZATION

This paper sets up a theoretical monopolistic competition model to analyze the impact of globalization on specialization with different endogenous sunk-costs technologies between countries. We prove that the factors affecting the relationship between globalization and specialization include the country-size effect and the technology-advantage effect. We show that, in the case of a country with a smaller endogenous sunk-cost technology advantage, if the country-size effect dominates the technology-advantage effect, then the number of the firms in monopolistic competition or the level of specialization will rise after trade, and vice versa.

An Integration of Neoclassical Growth Theory and Economic Structural Change with Monopolistic Competition Theory

Wealth accumulation is a deterministic factor mechanism of national economic growth. Neoclassical growth theory is basically concerned with capital and wealth accumulation in perfectly competitive market. Global markets are characterized by a great variety of markets. Nevertheless, there only a few rigorous models of wealth accumulation with other types of markets within neoclassical growth framework. This study attempts to contribute literature of economic growth by introducing monopolistic competition and monopoly into neoclassical growth theory. The model is based on a few well-established economic theories. The model is constructed within framework of the Solow-Uzawa two-sector neoclassical growth model. The description of to monopolistic competition is influenced by the Dixit-Stiglitz model of monopolistic competition. The modelling of monopoly is based on monopoly theory. We model behavior of the household with Zhang’s utility function and concepts of current income and disposable income. The unique contribution of this research is to integrate these theories in a comprehensive framework. We construct the basic model and then analyze properties of the model. The existence of a unique equilibrium point is identified by simulation. The effects of changes in some parameters comparative static analyses in some parameters.

Dynamic Monopolistic Competition

I study a dynamic variant of the Dixit–Stiglitz (Am Econ Rev 67(3), 1977) model of monopolistic competition by introducing price stickiness à la Fershtman and Kamien (Econometrica 55(5), 1987). The analysis is restricted to bounded quantity and price paths that fulfill the necessary conditions for an open-loop Nash equilibrium. I show that there exists a symmetric steady state and that its stability depends on the degree of product differentiation. When moving from complements to perfect substitutes, the steady state is either a locally asymptotically unstable (spiral) source, a stable (spiral) sink or a saddle point. I further apply the Hopf bifurcation theorem and prove the existence of limit cycles, when passing from a stable to an unstable steady state. Lastly, I provide a numerical example and show that there exists a stable limit cycle.

On equilibrium in monopolistic competition with endogenous labor

We consider a model of monopolistic competition with several heterogeneous sectors and endogenous labor supply. For low (high) values of the labor supply elasticity, we show that there is always a unique equilibrium. For medium values of the labor supply elasticity, there are either zero or two equilibria.

Hiding Filthy Lucre in Plain Sight: Theory and Identification of Business-Based Money Laundering

Proceeds from illicit activities percolate into the legal economy through several channels. We exploit international regulations targeting money laundering via the financial sector to identify the flows of “dirty money” into legitimate establishments: business-based money laundering (BBML). Our variant of the monopolistic competition model embeds a drug cartel that channels illicit proceeds into an offshore financial investment and into BBML. Tighter regulations in one channel increase the flow in the other. We use a research design that links U.S. county business activity to the evolution of anti-money-laundering regulations in Caribbean jurisdictions to provide the first empirical evidence of the phenomenon.

Environmental Compliance and Enterprise Innovation: Empirical Evidence from Chinese Manufacturing Enterprises.

This paper embeds environmental compliance factor and compliance cost factor into the M-O monopolistic competition and multi-product firm model to construct a theoretical model applicable to environmental compliance and enterprise innovation. In addition, we also construct a new environmental compliance index. We use the random-effects Tobit model and the double hurdle model to empirically test the micro-data from the Database of China Industrial Enterprises from 1998 to 2013, then we use the Generalized Propensity Score Matching (GPSM) to conduct a robustness test. The robustness conclusion is that environmental compliance has a significant U-shaped relationship with enterprise innovation, which means, environmental compliance will inhibit enterprise innovation on the left of the inflection point of environmental compliance (0.669), while environmental compliance on the right of the inflection point will promote enterprise innovation. The sub-sample regressions show that, enhanced environmental compliance of state-owned enterprises, mature enterprises, core area enterprises and export enterprises with low level of the environmental compliance, makes the greater inhibition to enterprise innovation, and enhanced environmental compliance of above enterprises with high level of the environmental compliance, makes the greater contribution to enterprise innovation. To this end, the government should adopt the policy, from the shallower to the deeper, to promote the construction of environmental compliance, and identify the inflection point of the environmental compliance on enterprise innovation to stimulate the role of environmental compliance in promoting enterprise innovation.

Taxes and unemployment

AbstractThe present model revisits the issue of unit and ad valorem taxes in a model of monopolistic competition. It is shown that if the assumption of full employment is relaxed, then taxation can increase employment conditionally when the elasticity of substitution among varieties is low. Moreover, with the same level of initial unemployment, ad valorem tax is better than unit tax in terms of employment, when the targeted tax revenue is relatively high and scale economies are strong.