Product Differentiation, Monopolistic Competition, and Public Policy

Roger W Koenker, Martin Perry

Research output: Contribution to journalArticlepeer-review


This paper generalizes a model of monopolistic competition attributable to Spence (1976). Firms produce symmetrically differentiated products with declining or U-shaped average costs. Free entry drives profits to zero in equilibrium. Spence finds that when firms behave "competitively," in a specific sense, the market equilibrium yields too little product diversity. However, when Spence's "competitive" behavioral assumption is relaxed, we find that the market may produce excessive diversity; this occurs when product differentiation is weak relative to scale economies of production. We also study two second-best regulatory policies and characterize conditions under which they are potentially effective in improving the market outcome.
Original languageEnglish (US)
Pages (from-to)217-231
JournalThe Bell Journal of Economics
Issue number1
StatePublished - 1981


  • economies of scale
  • market equilibrium
  • product differentiation
  • industrial regulation
  • monopolistic competition
  • industrial output
  • economic benefits
  • industrial products
  • average cost


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