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Monopolistic competition under horizontal and vertical differentiation

Author

Listed:
  • Kichko, Sergei
  • Marini, Marco A.
  • Saulle, Riccardo D.
  • Thisse, Jacques-François

Abstract

This paper extends the CES model of monopolistic competition to the case where varieties are both horizontally and vertically differentiated. A distinctive feature of our model is the presence of a network externality, which operates through the number of varieties available at each quality level. Depending on the quality gap, there are corner equilibria in which consumers purchase only high-quality or low-quality varieties, or an interior equilibrium in which consumers are split between the two qualities. Unlike the CES model of monopolistic competition, the equilibrium is never efficient and the market may even select the outcome with the lowest surplus.

Suggested Citation

  • Kichko, Sergei & Marini, Marco A. & Saulle, Riccardo D. & Thisse, Jacques-François, 2026. "Monopolistic competition under horizontal and vertical differentiation," FEEM Working Papers 396374, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemwp:396374
    DOI: 10.22004/ag.econ.396374
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    References listed on IDEAS

    as
    1. Ortiz-Ospina Esteban, 2017. "Monopolistic Competition and Exclusive Quality," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(2), pages 1-14, April.
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    5. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    6. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    7. Steven Berry & Joel Waldfogel, 2010. "Product Quality And Market Size," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 1-31, March.
    8. Degryse, Hans, 1996. "On the Interaction between Vertical and Horizontal Product Differentiation: An Application to Banking," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 169-186, June.
    9. Hendrik Döpper & Alexander MacKay & Nathan H. Miller & Joel Stiebale, 2025. "Rising Markups and the Role of Consumer Preferences," Journal of Political Economy, University of Chicago Press, vol. 133(8), pages 2462-2505.
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    More about this item

    Keywords

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    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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