Osaka Workshop on Economics of Institutions and Organization (#148)

We study the equilibrium and the optimal resource allocation in a monocentric city model under monopolistic competition among heterogeneous firms with a variable elasticity of substitution (VES) preference. First, we show that in an equilibrium, the output of firms with high productivity is under-produced and the output of firms with low productivity is over-produced. Also, firms with too low productivity remain in the market. This is the market distortion brought about by firm heterogeneity and VES preference. Second, an increase in city size increases the output per firm with high productivity, while it decreases the output per firm with low productivity. Thus, the increase in city size acts to correct the market distortions introduced by firm heterogeneity and VES preference.Abstract：Kazuhiro Yamamoto