The sources of sharing externalities: Specialization vs Competition

In this paper, we undertake an in-depth inquiry into the nature of sharing externalities, and study how they affect the market outcome. We show that the key thing for understanding sharing externalities is the interplay between two forces: the specialization/complexity effect, on the one hand, and the competition effect, on the other hand. How the interaction between these two forces generates endogenous increasing returns to scale is definitely understudied in the literature because of the widely used assumption that technology in the final sector displays constant elasticity of substitution (CES) across the employed intermediates. Under CES technologies, the equilibrium markup, which may serve as a reverse measure of the toughness of competition, remains unaffected by entry, as well as by market-size shocks. As a consequence, the competition effect is washed out. The aim of our article is to fix this drawback. In order to achieve our purpose, we develop an extension of the Ethier's (1982) model to the case of a non-specified constant-returns-to-scale (CRS) technology in the final-good sector. The main result of our approach is a lucid decomposition of external increasing returns to scale into two components: (i) a competition effect, which stems from the market interactions between producers of intermediate inputs, and (ii) a specialization/complexity effect. Through this decomposition, we show that the gains from specialization are, in general, not the only factor of external increasing returns to scale. Competition in the intermediate sector also plays a fundamental role. In the CES case (which dominates in the literature), external increasing returns to scale are fully driven by the gains from specialization. At the other extreme is the translog technology, where the external increasing returns to scale are induced solely by the competition effect. In between these two limit-situations, we find that both effects (specialization/complexity and competition) do matter in shaping market outcomes. The other findings of the paper are as follows. First, we obtain a full characterization of the impact of horizontal innovation on prices, markups, and wages. Our model allows us to make a distinction between price-decreasing/increasing and markup-decreasing/increasing competition, and provides necessary and sufficient conditions for each type of competition to occur. Second, we also discriminate between wage-increasing and wage-decreasing competition, which suggests a microeconomic foundation for flexible functional forms of the relationship between. In addition, we find that the competition effect may either reinforce or weaken the impact of the specialization effect on aggregate output

Occupational choice of migrants: does NEG tell something new?

We consider an empirical model in which individuals choose jointly their destination country and occupational choice. We plan to estimate this model using Ukrainian micro-data. The main results (to be yet obtained) will shed light on joint determinants of workers' migration decisions and their occupational choice in destination regions

Do we go shopping downtown or in the 'burbs'? Why not both?

We study the ever more integrated and ever more unbalanced trade relationships between European countries. To better capture the complexity of economic networks, we propose two global measures that assess the trade integration and the trade imbalances of the European countries. These measures are the network (or indirect) counterparts to traditional (or direct) measures such as the trade-to-GDP (Gross Domestic Product) and trade deficit-to-GDP ratios. Our indirect tools account for the European inter-country trade structure and follow (i) a decomposition of the global trade flow into elementary flows that highlight the long-range dependencies between exporting and importing economies and (ii) the commute-time distance for trade integration, which measures the impact of a perturbation in the economy of a country on another country, possibly through intermediate partners by domino effect. Our application addresses the impact of the launch of the Euro. We find that the indirect imbalance measures better identify the countries ultimately bearing deficits and surpluses, by neutralizing the impact of trade transit countries, such as the Netherlands. Among others, we find that ultimate surpluses of Germany are quite concentrated in only three partners. We also show that for some countries, the direct and indirect measures of trade integration diverge, thereby revealing that these countries (e.g. Greece and Portugal) trade to a smaller extent with countries considered as central in the European Union network

Price competition in product variety networks

We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degrees of substitutability (edges). We also locate consumers into this network, so that the location of each consumer (node) corresponds to her “ideal” variety. We show that there exists a unique Bertrand–Nash equilibrium where prices are determined by both the firms' sign-alternating Bonacich centralities and the average willingness to pay across consumers. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the central firm does not always enjoy higher monopoly power than the peripheral firms

Intersectoral Markup Divergence

We develop a general equilibrium model of monopolistic competition with a traded and a non-traded sector. Using a broad class of homothetic preferences—that generate variable markups, display a simple behavior of their elasticity of substitution, and nest the ces as a limiting case—we show that trade liberalization: (i) reduces domestic markups and increases imported markups in the traded sector; (ii) increases markups in the non-traded sector; and (iii) increases firm sizes in both sectors. Thus, while domestic and export markups in the traded sector converge across countries, markups diverge across sectors within countries. The negative welfare effects of higher markups and less consumption diversity in the non-traded sector dampen the positive welfare effects of lower markups and greater diversity in the traded sector

Replication package for: "Toward a General Theory of Peer Effects"

<p>Replication package for "Towards a General Theory of Peer Effects", Econometrica.</p&gt

Toward a theory of monopolistic competition

We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shocks are characterized through necessary and sufficient conditions. Furthermore, we show that the attention to the CES based on its normative implications was misguided: we propose a new class of preferences, which express consumers' uncertainty about their love for variety, that yield variable markups and may sustain the optimum. Last, we show how our approach can cope with heterogeneous firms once it is recognized that the elasticity of substitution is firm-specific.SCOPUS: ar.jinfo:eu-repo/semantics/publishe

The network origins of entry

We develop a model of the process of entry under social learning via word-of-mouth (WOM). An incumbent’s product is known to the consumers, while the success of a potential entrant hinges on generating consumer awareness of the entrant’s product through WOM. We model WOM as a percolation process on a random graph. We show that whether an entrant can gain a non-negligible level of awareness depends on the social network structure via two sufficient statistics, which are functions of the first three factorial moments of the degree distribution. We categorize the different pricing equilibria into the classical blockaded, deterred, and accommodated entry taxonomy. Under deterred entry, our model produces a model of limit pricing by an incumbent to prevent an entrant gaining a non-negligible level of awareness. By focusing on multinomial logit demand and on a mixed-Poisson degree distribution, we show that increasing the network density shifts the pricing equilibrium from blockaded to deterred and, finally, to accommodated entry. Using numerical simulations, we also show that the aggregate consumer surplus may be non-monotonic with respect to network density. Finally, if the incumbent has knowledge about the consumer’s number of friends and can charge personalized prices, we find that it is optimal for the incumbent to charge lower prices to more-connected consumers

Toward a theory of monopolistic competition *

Abstract We propose a general model of monopolistic competition, which encompasses existing models while being exible enough to take into account new demand and competition features. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sucient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous rms and consumers

Do we go shopping downtown or in the 'burbs ?

We combine spatial and monopolistic competition to study market interactions between downtown retailers and an outlying shopping mall. Consumers shop at either one marketplace or at both, and buy each variety in volume. The market solution stems from the interplay between the market expansion effect generated by consumers seeking more opportunities, and the competition effect. Firms’ profits increase (decrease) with the entry of local competitors when the former (latter) dominates. Downtown retailers vanish swiftly when the mall is large. A predatory but efficient mall need not be regulated, whereas the regulator must restrict the size of a mall accommodating downtown retailers