Continuous spatial monopolistic competition: matching goods with consumers

Maxim Goryunov, Sergey Kokovin and Takatoshi Tabuchi

Economic Theory, 2022, vol. 74, issue 3, No 4, 793-832

Abstract: Abstract Our novel approach enriches the general additive monopolistic competition model with a space of product characteristics: consumers’ “ideal varieties”. This paper bridges two traditions in modelling markets with horizontal product differentiation: the Hotelling’s (Econ J 39(153):41–57, 1929) “address economy” and Chamberlinian Dixit–Stiglitz monopolistic competition. Unlike Hotelling, our partially localised competition involves intersecting zones of service among producers. When population grows, increasing/decreasing elasticity of elementary utility governs increasing/decreasing prices. Increasing market size induces an increase in the firm density, but with the presence of transport cost, the firm’s range of service decreases, consumers concentrate their consumption closer to their ideals, and there are savings in transport costs. Thereby, finer matching among buyers/sellers becomes the important welfare benefit from a thicker market. That is, our model sets a finer matching of goods to tastes as a new source of gains rather than variety being the only reason for gains. Free entry remains socially excessive, under natural preferences.

Keywords: Monopolistic competition; Spatial competition; Optimal product diversity; Finer matching; Range of service (search for similar items in EconPapers)
JEL-codes: L11 L13 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Continuous Spatial Monopolistic Competition: Matching Goods With Consumers (2017)
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DOI: 10.1007/s00199-021-01380-7

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