Time Use and Heterogeneous Markups

Abstract

We enrich standard models of imperfect competition by allowing consumer demand for market goods to depend non-separably on off-market time. Consumers value final consumption experiences that require both market purchases and time, which reshapes demand elasticities through two opposing forces. First, because time is an input, changes in market prices translate only partially into changes in the cost of an experience and second, households can substitute time for market purchases in response to price variation. We show how these forces alter the mapping from markups to welfare by distinguishing between markups and a holistic counterpart that accounts for the time cost of consumption. In a monopolistically competitive environment, firm selection and entry is governed solely by the elasticity of substitution between time use and market purchases, and markup dispersion can be consistent with efficiency when time and market purchases are perfect complements. Extending the analysis to oligopolistic competition, we show that forces that raise markups, like greater market concentration and less competitive conduct, also amplify the gap between the usual and holistic markups.