Welfare Analysis and Policy Implications in Melitz-Type Model Where Markup Differs Across Industries

We construct a monopolistic competition model considering different markups across industries and firm-level heterogeneity of productivity. An excess entry occurs in low-markup (competitive) industry, and vice versa in high-markup (non-competitive) industry. To achieve the optimum allocation, a social planner should implement an appropriate mix of policies, whose requirement is tighter than the homogeneous-firm model under some situations. The total amount of optimum subsidy (tax) is dependent on the property of distribution when the elasticity of substitution between industries is above unity