Capital-labor Substitution and Endogenous Fluctuations: a Monopolistic Competition Approach with Variable Mark-up

Journal article: In macroeconomics, economists introduce most frequently imperfect competition on product markets using the Dixit and Stiglitz (1977) monopolistic competition model. However, by assumption, this framework ignores one important feature of imperfect competition: strategic interactions between producers. Taking into account this remark and following Yang and Hejdra (1993), this paper analyzes an overlapping generations model where strategic interactions between producers are introduced and examines how they affect the stability properties of the steady state. Because of free entry, strategic interactions between producers imply a new dynamic feature, mark-up variability, promoting indeterminacy and endogenous cycles. Indeed, in contrast to the model without strategic interaction, endogenous fluctuations can occur when the substitution between the production factors, capital and labor, is not too weak, but in accordance with empirical estimates.

Author(s)

Thomas Seegmuller

Journal
  • Japanese Economic Review
Date of publication
  • 2009
Keywords
  • Endogenous fluctuations
  • Imperfect competition
  • Strategic interactions
  • Mark-up variability
  • Capital-labor substitution
  • Overlapping generations
Pages
  • 301-319
Version
  • 1
Volume
  • 60