Time Use and the Efficiency of Heterogeneous Markups

Brian Albrecht, Thomas Phelan and Nick Pretnar

No 23-28, Working Papers from Federal Reserve Bank of Cleveland

Abstract: What are the welfare implications of markup heterogeneity across firms? In standard monopolistic competition models, such heterogeneity implies inefficiency even in the presence of free entry. We enrich the standard model with heterogeneous firms so that preferences are non-separable in off-market time and market consumption and show that this changes the welfare implications of markup heterogeneity. In this context, homogeneity of markups is neither necessary nor sufficient for efficiency. The marginal cost of the marginal firm is weakly inefficiently high when off-market time and market consumption are complements and inefficiently low when they are substitutes, and the equilibrium allocation devotes weakly too few resources to firm creation. However, when off-market time and market consumption are perfect complements, markups are heterogeneous across firms and yet the equilibrium allocation is efficient.

Keywords: monopolistic competition; markups; efficiency; time use; home production; elasticity of substitution; selection; heterogeneous firms (search for similar items in EconPapers)
JEL-codes: D1 D4 D6 L1 (search for similar items in EconPapers)
Pages: 51
Date: 2023-11-16
New Economics Papers: this item is included in nep-com, nep-ind and nep-reg
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Working Paper: Time Use and the Efficiency of Heterogeneous Markups (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:97319

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DOI: 10.26509/frbc-wp-202328

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