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Title:Substitutability and Competition in the Dixit-Stiglitz Model PDF Logo
Authors:Koeniger, Winfried
Licandro, Omar
Issue Date:2004
Series/Report no.:IZA Discussion paper series 1007
Abstract:The effects of competition on growth are analyzed in the recent literature by comparing economies with the same market structure but different degrees of substitutability. In this note, we show that in a general equilibrium model with monopolistic competition – la Dixit- Stiglitz the effect of substitutability on the allocation of resources is independent of the associated change in competition. Higher substitutability increases welfare, output and productivity because resources shift towards the most productive sectors. However, since markups are equal across sectors, changes in market power do not affect the relative price of consumption goods, implying that the induced changes in market power do not have any direct effect on equilibrium allocations.
Subjects:monopolistic competition
substitution
market power
output
JEL:L16
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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