xii. monopoly pricing and limited needs. the basic idea: take a dixit-stiglitz type model if utility...
Post on 31-Mar-2015
216 Views
Preview:
TRANSCRIPT
XII. Monopoly pricing and limited needs
The basic idea:
• Take a Dixit-Stiglitz type model
• If utility is non homothetic, the markup depends on how much of each good is consumed
• TFP growth changes that amount
• The markup changes, and thus the distribution of income between profits and wages
The central result
• If utility is bounded (limited needs), then there is a negative relationship between the consumption level and the demand elasticity
• Growth may therefore be detrimental to workers
The model
Isoelastic utility
• The markup is constant
• Wages are proportional to productivity
• So are profits
• TFP growth has no effect on the factor distribution of income
Non homothetic utility
Monopoly pricing
The limited needs property:
• Assume u() is bounded
• The price-elasticity of demand gets arbitrary low when consumption goes up to arbitrary levels
• People are near-satiated– Not willing to pay much for the good– But even less sensitive to proportional
changes in its price
Consequence:
• As the economy gets richer, total elasticity of demand goes down arbitrarily
• The markup becomes arbitrarily large
• Wages must become lower over some range
• Rise in markup more than offsets rise in productivity
Example:
Productivity
Real wages
Figure 9.1: Effect of productivity onwages
Interpretation
• Wages grow less than proportionally to productivity
• Profits grow more than proportionally• In the Marxian zone, wages fall: more than 100
% of GDP growth appropriated by profits• Workers consume the same goods as
capitalists, and the latter exert a negative externality on the former by being careless consumers as GDP goes up
Introducing new varieties
• A larger N reduces consumption of each variety
• People are less satiated, and elasticity goes up
• Markups fall, and wages go up• More TFP is needed to enter the Marxian
zone• Furthermore, incentives to introduce new
goods larger when a goes up
From capitalists to knowledge workers
• Take the basic Roy specialization model
• Assume that human capital is used to produce new blueprints
• Competition among R and D firms links profits with return to human capital
• A rise in a raises the returns to H
• More people become knowledge workers
Extending the model
Dynamics
• Number of varieties grows endogenously• TFP grows exogenously• Productivity at inventing a new variety
grows exogenously at the same rate• Consumers allocate their intra-period
expenditures by maximizing intra-period utility same determination of markets
• Intertemporal optimization of the profile of expenditures
Balanced growth path
Balanced growth kills the Marxian result
• Along the BGP, ω and w grow at the same rate• Distribution of income invariant• Growth in N offsets growth in A and markups
remain constant• But a once-and-for-all jump in A increases
inequality• Thus, it is imbalances between TP in the
production of goods and TP in the production of knowledge that matters
H/L
ω/w
Figure 9.2: Impact of an increase in total factorproductivity
Skill
Income
Creativeworkers
Productiveworkers
Figure 9.3: Impact of productivitygrowth on the distribution of wages,in a Solovian zone.
A B
Skill
Income
Figure 9.4: Impact of productivitygrowth on the distribution of wages,in a Marxian zone
A B
Globalization
• Two countries, home vs. Foreign
• They differ in labor endowments and productivity levels
• Under autarky, no trade and a fixed number of firms
• Under globalization, trade in goods and firms can relocate to equalize profits
Some workers may lose from globalization…
• Firm mobility equalizes labor costs across countries
• Goods mobility implies there is a single markup for each good worldwide, which by symmetry is the same across firms
• A country may lose from globalization in Ph.P.P. terms because it faces a higher markup
• But it gains from greater diversity
…and these workers may be in the poorer country
• Markup goes up if world consumption of the good is higher than autarkic consumption
• Will be the case in the least productive country if number of brands is initially not too small there
Symmetrical equilibrium
Comparing with Autarky
top related