Continuous spatial monopolistic competition: matching goods with consumers

Goryunov M. Kokovin S. Tabuchi T.
October 2022 Springer Science and Business Media Deutschland GmbH

Economic Theory
2022 #74 Issue 3 793 - 832 pp.

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.

Finer matching , Monopolistic competition , Optimal product diversity , Range of service , Spatial competition

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Department of Economics, School of Sciences and Humanities, Nazarbayev University, Kabanbay Batyr Ave., Nur-Sultan, 010000, Kazakhstan
National Research University Higher School of Economics, Moscow, Russian Federation
Faculty of Global Management, Chuo University and RIETI, Tokyo, Japan

Department of Economics
National Research University Higher School of Economics
Faculty of Global Management

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