Working Paper

Melitz, Marc, Thierry Mayer, and Gianmarco IP Ottaviano. 2013. Market Size, Competition, and the Product Mix of Exporters.Abstract
PDF
We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.
Melitz, Marc, and Stephen Redding. 2013. Firm Heterogeneity and Aggregate Welfare.Abstract
PDF
Appendix.pdf
We examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. We consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, we show that the two models have different aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogeneous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, we find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade (as shown by Arkolakis, Costinot and Rodriguez-Clare, 2012); but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.
Melitz, Marc, Fabio Ghironi, and Florin Bilbiie. 2006. Monopoly Power and Endogenous Variety in Dynamic Stochastic General Equilibrium: Distortions and Remedies.Abstract
PDF
We study the e¢ ciency properties of a dynamic, stochastic, general equilibrium, macroeco- nomic model with monopolistic competition and …rm entry subject to sunk costs, a time-to-build lag, and exogenous risk of …rm destruction. Under inelastic labor supply and linearity of produc- tion in labor, the market economy is e¢ cient if and only if symmetric, homothetic preferences are of the C.E.S. form studied by Dixit and Stiglitz (1977). Otherwise, e¢ ciency is restored by properly designed sales, entry, or asset trade subsidies (or taxes) that induce markup synchro- nization across time and states, and align the consumer surplus and pro…t destruction e¤ects of …rm entry. When labor supply is elastic, heterogeneity in markups across consumption and leisure introduces an additional distortion. E¢ ciency is then restored by subsidizing labor at a rate equal to the markup in the market for goods. Our results highlight the importance of preserving the optimal amount of monopoly pro…ts in economies in which …rm entry is costly. Inducing marginal cost pricing restores e¢ ciency only when the required sales subsidies are …nanced with the optimal split of lump-sum taxation between households and …rms.