Monopolistic Competition and Product Diversity: Review and Extension

Abstract

The modeling of monopolistic competition has contributed to rapid developments in numerous fields of economics, notably macroeconomics, international trade, industrial organization, economic growth and economic geography. This paper provides a brief survey and synthesis of the original monopolistic competition models and their subsequent developments, including the works of Spence (1976a, 1976b) and Dixit and Stiglitz (1977) that are based on the "love-of-variety" approach, the works of Lancaster (1966, 1979) that are based on the "love-of-characteristic" approach, and the large-group monopolistic competition models of Hart (1979, 1985a, 1985b), among others. This paper will also examine some of the special utility functions frequently used in the literature on models of monopolistic competition. Perhaps owing to the complexity of these models, the literature lacks a broad and systematic coverage of this essential subject. This paper aims to help fill the gap.

Keywords: monopolistic competition, product diversity, love-of-variety, love-of-characteristic models

JEL Classification: D40, D43, D49