Product Differentiation, Monopolistic Competition, and Public Policy
AbstractThis 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.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal Bell Journal of Economics.
Volume (Year): 12 (1981)
Issue (Month): 1 (Spring)
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Web page: http://www.rje.org
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- David M. Cutler & Robert S. Huckman & Jonathan T. Kolstad, 2009.
"Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery,"
NBER Working Papers
15214, National Bureau of Economic Research, Inc.
- David M. Cutler & Robert S. Huckman & Jonathan T. Kolstad, 2010. "Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 51-76, February.
- David M. Cutler & Robert S. Huckman & Jonathan T. Kolstad, 2009. "Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery," Harvard Business School Working Papers 10-011, Harvard Business School.
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