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A Competitive Equilibrium With Product Differentiation

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Abstract

This note gives a method of determining the long-run equilibrium output of a firm operating under imperfect competition that differs from standard methods of output determination and reveals properties of the equilibrium that standard methods conceal. This method requires a basic cost-effectiveness condition to hold, which leads to a highly elastic demand. If we strengthen that condition a bit, long-run equilibrium under free entry and exit becomes indistinguishable from a long-run equilibrium under perfect competition, even though products are differentiated and the condition given by Rosen for perfect competition with product differentiation fails to hold.

Suggested Citation

  • Richard L. Carson, 2004. "A Competitive Equilibrium With Product Differentiation," Carleton Economic Papers 04-18, Carleton University, Department of Economics, revised 13 Jul 2017.
    • Handle: RePEc:car:carecp:04-18
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    References listed on IDEAS

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    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    3. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    4. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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