Market structure and welfare under monopolistic competition

- Non-monotonic link between market concentration and welfare under monopolistic competition.
- Differentiated impact of exogenous and endogenous sunk costs on welfare.
- Endogenous cross-product substitutability in a Dixit-Stiglitz model of monopolistic competition.

This paper analyzes the relationship between market structure and welfare by developing a model of monopolistic competition in which exogenous entry costs and endogenous differentiation costs determine market concentration and market power. A non-monotonic link is identified between these costs and welfare under a decentralized equilibrium. These results detail new reasons why simple market concentration indicators are a misleading statistic for welfare evaluations.