Continuous Spatial Monopolistic Competition: Matching Goods With Consumers

Abstract

Our new approach enriches the general additive monopolistic competition model (AMCM) - with a space of product characteristics: consumers' "ideal varieties". Unlike Hotelling, such partially localized competition involves intersecting zones of service among (continuously distributed) producers. Then, the uniform equilibrium firms' density increases with growing population, as with the usual AMCM. However, now increasing/decreasing prices are determined by the increasing/decreasing elasticity of elementary utility (instead of demand elasticity in AMCM). A new characteristic - the firm's range of service - decreases. Such finer matching between buyers and sellers becomes a new source of welfare gain from a thicker market, unlike the variety benefit in AMCM. The free-entry competition remains socially excessive under some natural preferences.

Keywords: monopolistic competition, spatial competition, optimal product diversity, gains from trade, finer matching

JEL Classification: L11, L13