The Economics of Product Variety: A Survey

TLDR

Demand for product variety arises from consumer taste diversity and heterogeneous preferences, yet supply is constrained by scale economies that trade off welfare gains against lower unit costs. The paper analyzes how the trade‑off between variety benefits and scale economies shapes product variety across market structures, comparing actual and optimal levels. The survey reviews theoretical work on single‑product firms in monopolistic competition, extending Chamberlinian and Hotelling frameworks to virtual product spaces, and examines multiproduct firms in monopolistic and oligopolistic markets, including imperfect‑information settings.

Abstract

Demand for variety may arise from a taste for diversity in individual consumption and/or from diversity in tastes even when each consumer chooses a single variant. The full degree of variety potentially demanded will not, in general, be supplied because scale economies (even to a small degree) mean that the potential welfare or revenue gain from greater variety must be balanced against the lower unit production costs with fewer variants. The economics of product variety consists essentially in analysing the effect of this balance in different situations, and comparing the degree of product variety for different market structures with each other and with the optimum. The survey commences with the work on market structures with single product firms (generalized monopolistic competition), tracing modern developments in both the Chamberlinian and Hotelling traditions. The latter has been particularly fruitful, due to the expansion of the original locational ideas into virtual spaces in product characteristics. The emphasis in recent work on product variety has been on multiproduct firms in both monopolistic and oligopolistic structures, including strategic market preemption. Although most work has been in a full information context, there have been advances in product variety under imperfect information (either by consumers to properties of the firms' products or firms as to consumers' demands).