DP2151 Monopolistic Competition, Multiproduct Firms and Optimum Product Diversity

Author(s): Gianmarco Ottaviano, Jacques-François Thisse
Publication Date: May 1999
Keyword(s): Monopolistic Competition, Multiproduct Firms, Product Variety
JEL(s): D43, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2151

This paper tackles the issue of optimum product diversity in an imperfectly competitive market with small or large firms. First, it develops a quadratic utility model of monopolistic competition with horizontal product differentiation which avoids some of the main pitfalls of the S-D-S approach. Second, it extends the model to the case of multiproduct firms showing how product diversity is affected with respect to monopolistic competition. In particular, it is shown that monopolistic competition with single-product firms is the limiting case of oligopolistic competition with multiproduct firms when either varieties gets more and more differentiated or when the entry cost goes further and further down.