Product differentiation and welfare: Comment

Ahmet Özçam

Economic Modelling, 2010, vol. 27, issue 1, 214-216

Abstract: In general it may be argued that the monopolistically competitive industry is not consistent as viewed from the game-theoretic point of view, and it ignores the strategic aspects of competition. This comment points out specifically how the welfare implications derived from a Nash equilibrium model in which the goods are imperfectly substitutes used by Spence in many articles are incorrect. The total quantities offered by firms at Nash equilibria within this model and those of the market demand curve at the same price levels are not equal. All emanate from the misspecification of the price equation with substitutable goods by Spence which is not appropriate for the Nash equilibria model with many firms. Moreover, some other very important papers of Spence which follow are critisized for the same mathematical contradiction.

Keywords: Monopolistically; competitive; industry; Nash; equilibrium; Consistency; of; industry; outputs; and; market; demand (search for similar items in EconPapers)
Date: 2010
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