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Product Differentiation, Monopolistic Competition, and Public Policy

  • Roger W. Koenker
  • Martin K. Perry
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    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.

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    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 12 (1981)
    Issue (Month): 1 (Spring)
    Pages: 217-231

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    Handle: RePEc:rje:bellje:v:12:y:1981:i:spring:p:217-231
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