Substitutability and Competition in the Dixit-Stiglitz Model
Journal
IZA Discussion Papers 1007
Type
discussion paper
Date Issued
2004-02
Author(s)
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 à 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 a.ect the relative price of consumption goods, implying that the induced changes in market power do not have any direct effect on equilibrium allocations.
Language
English
Keywords
monopolistic competition
substitution
market power
output
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Subject(s)
Eprints ID
261024