Product Differentiation, Monopolistic Competition, and Public Policy
Volume: Volume 12, No. 1
Issue: Spring 1981
Pages: pp. 217-231
Authors: Roger W. Koenker and Martin K. Perry
Title: Product Differentiation, Monopolistic Competition, and Public Policy
Abstract: This paper generalizes a model of monopolistic competition attributable to Spence (1976). Firms produce symmetrically differentiated products with declining or U-shaped average costs. Free entry drives profits to zero in equilibrium. Spence finds that when firms behave "competitively," in a specific sense, the market equilibrium yields too little product diversity. However, when Spence's "competitive" behavioral assumption is relaxed, we find that the market may produce excessive diversity; this occurs when product differentiation is weak relative to scale economies of production. We also study two second-best regulatory policies and characterize conditions under which they are potentially effective in improving the market outcome.
JEL Classification
Microeconomics Theory of Firm and Industry under Imperfectly Competitive Market Structures (0226)
Regulation of Public Utilities (6130)