On monopolistic competition and optimal product diversity: workers' rents also matter |
| |
Authors: | Pierre M. Picard Eric Toulemonde |
| |
Affiliation: | CREA, University of Luxembourg; Department of Economics, FUNDP-University of Namur |
| |
Abstract: | 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. |
| |
Keywords: | L16 |
|
|