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Monopolistic competition under horizontal and vertical differentiation

Author

Listed:
  • Sergei Kichko

    (Department of Economics and Management, University of Trento and CESifo)

  • Marco A. Marini

    (Department of Social and Economic Sciences, Sapienza University of Rome)

  • Riccardo D. Saulle

    (Department of Economics and Management, University of Padova)

  • Jacques-Francois Thisse

    (CORE-UCLouvain and CEPR)

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

  • Sergei Kichko & Marco A. Marini & Riccardo D. Saulle & Jacques-Francois Thisse, 2026. "Monopolistic competition under horizontal and vertical differentiation," Working Papers 2026.11, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2026.11
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    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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