On the Effects of Income Heterogeneity in Monopolistically Competitive Markets

Kichko, Sergey; Picard, Pierre M.

doi:10.2139/ssrn.3751042

Cited by 3 publications

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“…Hence the last trader may make a profit, but there is no incentive for a new trader to enter the market with a new good. 17 Kichko and Picard (2020) discuss general conditions for demand functions that deliver this result. 18 One reason why the literature on variety in domestic consumption is sparse is that standard household surveys do not collect these data for manufactures.…”

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confidence: 93%

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Fading choice: transport costs and variety in consumer goods

Willem Gunning,

Krishnan,

Mengistu

2024

Economica

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We examine the spatial variation in variety of manufactured consumer goods to study how choice fades across space. We use data on 132 consumer goods and over 800 brands available from a purpose‐designed survey of fixed shops and periodic market stalls in towns and villages in Ethiopia. We find that local consumer choice fades, with fewer varieties in remoter villages. On average, these villages have approximately half the number of available items compared to their nearest market town. A fall in travel time of a half‐hour is associated with 4 extra goods and 9 brands. Variety also increases with inequality and market size. Furthermore, we estimate a model of heterogeneous consumers with a preference for variety and monopolistically competitive traders to disentangle the role of transport costs from the taste for variety, and to assess the consequences for prices. Our model estimates suggest that local consumer prices contain a markup of 8% above source town prices and transport costs. We demonstrate the significant costs to consumers from both low variety and high trade costs. Ignoring such costs means that poverty is underestimated in remote places. In turn, when infrastructure investments raise variety, the likely fall in poverty will be underestimated too.

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Section: Endnotesmentioning

confidence: 93%

“…1717 Kichko and Picard (2020) discuss general conditions for demand functions that deliver this result.…”

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confidence: 98%

Fading choice: transport costs and variety in consumer goods

Willem Gunning,

Krishnan,

Mengistu

2024

Economica

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“…We set the price elasticity at ε = 4 in order to match the time average for markups equal to 1.33 (see De Loecker et al 2020). The estimates of the pass-through elasticity vary in the range between 0.3 and 0.8 and we set ε pk = 0.6 at the rounded midpoint of this range (see Kichko and Picard 2020), which is also the value estimated by Campa and Goldberg (2005) and Amiti et al (2019).…”

Section: Parametersmentioning

confidence: 99%

Optimal income taxation under monopolistic competition

Tarasov

Zubrickas

2022

Econ Theory

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This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (Rev Econ Stud 38:175–208, 1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that quantity and variety distortions resulting from the market structure require adjustments to income tax policy, which also needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that in policy design the failure to account for the market structure results in a welfare loss of 1.77%. Motivated by practical cases, we study a policy regime that is solely based on income taxation. We show that departures from the social optimum can be compensated by lower and less regressive income taxes and a smaller government compared to the regime with income and commodity taxes. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.

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“…We set the price elasticity at ε = 4 in order to match the time average for markups equal to 1.33 (see de Loecker et al, 2020). The estimates of the pass-through elasticity vary in the range between 0.3 and 0.8 and we set ε pk = 0.6 at the rounded midpoint of this range (see Kichko and Picard, 2020), which is also the value estimated by Campa and Goldberg (2005) and Amiti et al (2019).…”

Section: Parametersmentioning

confidence: 99%

Optimal Income Taxation Under Monopolistic Competition

Tarasov

Zubrickas

2021

SSRN Journal

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This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that price and variety distortions resulting from the market structure imply that income tax policy needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that, when choosing optimal tax policy, the failure to account for the market structure results in a welfare loss of 1:77 percent. Motivated by practical cases, we study a policy regime that is solely based on income taxation. Under this policy regime, departures from the social optimum can be compensated by lower and less regressive income taxes than those obtained under the regime with all forms of taxation. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.

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On the Effects of Income Heterogeneity in Monopolistically Competitive Markets

Cited by 3 publications

References 0 publications

Fading choice: transport costs and variety in consumer goods

Fading choice: transport costs and variety in consumer goods

Optimal income taxation under monopolistic competition

Optimal Income Taxation Under Monopolistic Competition

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