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Optimal Product Proliferation in Monopoly: A Dynamic Analysis

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  • L. Lambertini

Abstract

The monopolist’s incentives towards product proliferation are evaluated in an optimal control model considering three alternative regimes: profit-seeking; social planning; and a hybrid case with monopoly pricing and a regulator setting product innovation to maximise welfare. In equilibtium, the profitseeking firm supplies a socially suboptimal number of varieties to reduce cannibalisation while the social planner exploits the same effect to satisfy consumers’ love for variety and decrease the market price of all products. In terms of the Schumpeter vs Arrow debate on the relationship between market structure and innovation incentives, the results obtained in this model have a definite Arrovian flavor

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 648.

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Date of creation: Oct 2008
Handle: RePEc:bol:bodewp:648
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Find related papers by JEL classification:
  • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
  • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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  1. Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
  2. Majerus, David W., 1988. "Price vs. quantity competition in oligopoly supergames," Economics Letters, Elsevier, vol. 27(3), pages 293-297.
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  4. Giacomo Bonanno, 1987. "Location Choice, Product Proliferation and Entry Deterrence," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 37-45.
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  7. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-414, May.
  8. Wernerfelt, Birger, 1986. "Product Line Rivalry: Note," American Economic Review, American Economic Association, vol. 76(4), pages 842-844, September.
  9. Anderson, Simon P & de Palma, Andre, 1992. "Multiproduct Firms: A Nested Logit Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 40(3), pages 261-276, September.
  10. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
  11. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  12. MacDonald, Glenn M & Slivinski, Alan, 1987. "The Simple Analytics of Competitive Equilibrium with Multiproduct Firms," American Economic Review, American Economic Association, vol. 77(5), pages 941-953, December.
  13. De Fraja, Giovanni, 1994. "A General Characterization of Multiproduct Cournot Competition," Bulletin of Economic Research, Wiley Blackwell, vol. 46(2), pages 171-183, April.
  14. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  15. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  16. R. Cellini & L. Lambertini, 2002. "Private and Social Incentives Towards Investment in Product Differentiation," Working Papers 431, Dipartimento Scienze Economiche, Universita' di Bologna.
  17. Cellini, Roberto & Lambertini, Luca, 2002. "A differential game approach to investment in product differentiation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 51-62, November.
  18. Jaskold Gabszewicz, Jean & Shaked, Avner & Sutton, John & Thisse, Jacques-Francois, 1986. "Segmenting the market: The monopolist's optimal product mix," Journal of Economic Theory, Elsevier, vol. 39(2), pages 273-289, August.
  19. Panzar, John C., 1989. "Technological determinants of firm and industry structure," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 1, pages 3-59 Elsevier.
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Cited by:

  1. Anton Bondarev & Alfred Greiner, 2017. "Catching-up and falling behind: Effects of learning in an R&D differential game with spillovers," Working papers 2017/02, Faculty of Business and Economics - University of Basel.
  2. Anton Bondarev, 2012. "The long-run dynamics of product and process innovations for a multi-product monopolist," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 21(8), pages 775-799, November.
  3. Bondarev, Anton A., 2012. "Optimal control over a continuous range of homogeneous and heterogeneous innovations with finite life-cycles," MPRA Paper 40068, University Library of Munich, Germany.
  4. Anton Bondarev, 2016. "Intensity of R&D competition and the generation of innovations in heterogeneous setting," Journal of Evolutionary Economics, Springer, vol. 26(3), pages 621-653, July.

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