Product Differentiation, Firm Size, and Entry
Using the ability of substitute products to constrain a firm’s pricing and output, 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. Under weak assumptions, a policy of free entry and exit is optimal even though all-around marginal-cost pricing does not prevail. Under monopolistic competition, firm size will not be too small, nor will the supplier of X have excess capacity.
|Date of creation:||29 Nov 2004|
|Date of revision:||06 Jan 2017|
|Publication status:||Published: Carleton Economic Papers|
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- 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..
- 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.
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