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  5. Monopolistic Competition and Efficiency under Firm Heterogeneity and Non-Additive Preferences

Monopolistic Competition and Efficiency under Firm Heterogeneity and Non-Additive Preferences

Abstract

We consider the single-sector version of the Melitz-Ottaviano model of monopolistic competition with heterogeneous firms. We characterize the first best and market allocations. We find that the market provides the first best level of entry but too little selection; hence, the market provides too many varieties, too little aggregate quantity, and allocates too little (much) production to low (high) cost realizations. Allowing for a broad family of quantity allocation functions, we establish sufficient conditions for the global optimality of the first best solution. Several important extensions are also examined.

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