Monopolistic competition under horizontal and vertical differentiation

Sergei Kichko, Marco Marini, Riccardo D. Saulle and Jacques-François Thisse

No 396374, FEEM Working Papers from Fondazione Eni Enrico Mattei (FEEM)

Abstract: This paper extends the CES model of monopolistic competition to the case where varieties are both horizontally and vertically differentiated. A distinctive feature of our model is the presence of a network externality, which operates through the number of varieties available at each quality level. Depending on the quality gap, there are corner equilibria in which consumers purchase only high-quality or low-quality varieties, or an interior equilibrium in which consumers are split between the two qualities. Unlike the CES model of monopolistic competition, the equilibrium is never efficient and the market may even select the outcome with the lowest surplus.

Keywords: Production Economics; Public Economics (search for similar items in EconPapers)
Pages: 28
Date: 2026-03-24
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https://ageconsearch.umn.edu/record/396374/files/NDL2026-11.pdf (application/pdf)

Related works:
Working Paper: Monopolistic Competition Under Horizontal and Vertical Differentiation (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemwp:396374

DOI: 10.22004/ag.econ.396374

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