Product Differentiation, Monopolistic Competition, and Public Policy

Roger W Koenker, Martin Perry

Research output: Contribution to journalArticle

Abstract

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
Volume12
Issue number1
DOIs
StatePublished - 1981

Fingerprint

Product differentiation
Public policy
Competition policy
Monopolistic competition
Profit
Economies of scale
Market equilibrium
Free entry
Regulatory policy
Average cost
Product diversity
Differentiated products

Keywords

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

Cite this

Product Differentiation, Monopolistic Competition, and Public Policy. / Koenker, Roger W; Perry, Martin.

In: The Bell Journal of Economics, Vol. 12, No. 1, 1981, p. 217-231.

Research output: Contribution to journalArticle

@article{58d347141ddf47729d9d869aa214c956,
title = "Product Differentiation, Monopolistic Competition, and Public Policy",
abstract = "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.",
keywords = "economies of scale, market equilibrium, product differentiation, industrial regulation, monopolistic competition, industrial output, economic benefits, industrial products, average cost",
author = "Koenker, {Roger W} and Martin Perry",
year = "1981",
doi = "10.2307/3003518",
language = "English (US)",
volume = "12",
pages = "217--231",
journal = "The Bell Journal of Economics",
issn = "0361-915X",
number = "1",

}

TY - JOUR

T1 - Product Differentiation, Monopolistic Competition, and Public Policy

AU - Koenker, Roger W

AU - Perry, Martin

PY - 1981

Y1 - 1981

N2 - 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.

AB - 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.

KW - economies of scale

KW - market equilibrium

KW - product differentiation

KW - industrial regulation

KW - monopolistic competition

KW - industrial output

KW - economic benefits

KW - industrial products

KW - average cost

U2 - 10.2307/3003518

DO - 10.2307/3003518

M3 - Article

VL - 12

SP - 217

EP - 231

JO - The Bell Journal of Economics

JF - The Bell Journal of Economics

SN - 0361-915X

IS - 1

ER -