Monopolistic Competition with Outside Goods

TLDR

The Chamberlinian monopolistically competitive equilibrium has been studied, but prior work has only briefly considered an industry outside the Chamberlinian group. The study aims to analyze a model of spatial competition that explicitly includes a second commodity. The authors model a two‑industry economy with symmetrically located firms in a zero‑profit equilibrium that can display unusual characteristics. The equilibrium exhibits kinked demand curves, leading to perverse effects of parameter changes, price rigidity in the short run, lower prices with higher costs in the long run, higher prices with larger markets, and perverse welfare outcomes at a kinked equilibrium.

Abstract

The Chamberlinian monopolistically competitive equilibrium has been explored and extended in a number of recent papers. These analyses have paid only cursory attention to the existence of an industry outside the Chamberlinian group. In this article I analyze a model of spatial competition in which a second commodity is explicitly treated. In this two-industry economy, a zero-profit equilibrium with symmetrically located firms may exhibit rather strange properties. First, demand curves are kinked, although firms make Nash conjectures. If equilibrium lies at the kink, the effects of parameter changes are perverse. In the short run, prices are rigid in the face of small cost changes. In the long run, increases in costs lower equilibrium prices. Increases in market size raise prices. The welfare properties are also perverse at a kinked equilibrium.