1. XII. Monopoly pricing and limited needs

2. 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

3. 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

4. The model

5. 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

6. Non homothetic utility

7. Monopoly pricing

8. 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

9. 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

10. Example:

11. Figure 9.1: Effect of productivity on
wages
Real wages
Productivity

12. 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

13. 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

14. 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

15. Extending the model

16. 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

18. Balanced growth path

19. 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

20. Figure 9.2: Impact of an increase in total factor
productivity
ω/w
H/L

21. Figure 9.3: Impact of productivity
growth on the distribution of wages,
in a Solovian zone.
Income
Productive
workers
Creative
workers A B
Skill

22. Figure 9.4: Impact of productivity
growth on the distribution of wages,
in a Marxian zone
Income
A B
Skill

23. 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

24. 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

25. …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

27. Symmetrical equilibrium

28. Comparing with Autarky