Working Paper: CEPR ID: DP2151
Authors: Gianmarco I.P. Ottaviano; Jacques-François Thisse
Abstract: This paper tackles the issue of optimum product diversity in an imperfectly competitive market with small or large firms. First, it develops a quadratic utility model of monopolistic competition with horizontal product differentiation which avoids some of the main pitfalls of the S-D-S approach. Second, it extends the model to the case of multiproduct firms showing how product diversity is affected with respect to monopolistic competition. In particular, it is shown that monopolistic competition with single-product firms is the limiting case of oligopolistic competition with multiproduct firms when either varieties gets more and more differentiated or when the entry cost goes further and further down.
Keywords: monopolistic competition; product variety; multiproduct firms
JEL Codes: D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer preferences (D11) | Number of varieties provided (L15) |
| Market structure (monopolistic competition with single-product firms) (L11) | Number of varieties provided (L15) |
| Second-best optimum (H21) | Number of varieties sold (Y90) |
| Second-best optimum (H21) | Price (D41) |
| Oligopolistic competition (multiproduct firms) (L13) | Product range provided by each firm (L11) |
| Oligopolistic competition (multiproduct firms) (L13) | Entire range of available varieties (Q13) |