Market Expansion Effects with Differentiated Goods: Monopoly versus Atomistic Competition

Abstract

In a horizontally differentiated goods market, where consumers face heterogeneous costs of entering the market and exhibit a taste for variety (via CES preferences) over the continuum of substitute goods, lowering the general market price level leads to increased consumer entry—the market expansion effect. Since atomistic competitors (each supplying 1 good) cannot influence this general price level, whilst a (multi-product) monopolist can, monopoly may lead to lower prices. In a model where market expansion effects are potentially large, the paper shows how monopoly leads to socially desirable lower prices, and greater variety, even when goods are arbitrarily close substitutes.