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Small group monopolistic competition in a GTAP model: meeting the Markusen challenge

Author

Listed:
  • Peter B. Dixon
  • Maureen T. Rimmer
Abstract
Since the 1990s, there have been rapid increases in concentration ratios in many industries in the U.S., Australia and, we suspect, in other countries. Despite this, applications of GTAP (the world's most widely used global economic model) continue to be based on pure competition or Melitz-style Large-Group Monopolistic Competition (LGMC). In either case, all firms are small, there is free entry, and industries make zero pure profits. Markusen challenges modellers to move to Small-Group Monopolistic Competition (SGMC) in which industries have high levels of concentration and firms are aware of the likely behaviour of their rivals. We create a version of GTAP in which some industries are modelled as SGMC. We make two generalization of earlier Melitz-LGMC specifications. First, we treat the perceived elasticity of demand by firms in SGMC industries as a variable. In our SGMC specification, mark-ups over marginal costs, which depend on perceived elasticities, fall when these elasticities are reduced by pro-competition policies. Second, we allow for sticky adjustment of the number of firms in an industry, and simulate situations in which entry is blocked and incumbent firms make excess profits.

Suggested Citation

  • Peter B. Dixon & Maureen T. Rimmer, 2024. "Small group monopolistic competition in a GTAP model: meeting the Markusen challenge," Centre of Policy Studies/IMPACT Centre Working Papers g-347, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-347
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    References listed on IDEAS

    as
    1. James Markusen, 2023. "Incorporating Theory-Consistent Endogenous Markups into Applied General-Equilibrium Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 8(2), pages 60-99, December.
    2. Ronald W. Jones, 2018. "The Structure of Simple General Equilibrium Models," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 4, pages 61-84, World Scientific Publishing Co. Pte. Ltd..
    3. Zeynep Akgul & Nelson B Villoria & Thomas W Hertel, 2016. "GTAP-HET: Introducing Firm Heterogeneity into the GTAP Model," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 111-180, June.
    4. Peter Dixon & Michael Jerie & Maureen Rimmer, 2019. "Melitz in GTAP Made Easy: the A2M Conversion Method and Result Interpretation," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 4(1), pages 97-127, June.
    5. Eddy Bekkers & Joseph Francois, 2018. "A Parsimonious Approach to Incorporate Firm Heterogeneity in CGE-Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(2), pages 1-68, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Small-group monopolistic competition; GTAP; Melitz and Markusen; Wage rates and pure profits;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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