A Competitive Equilibrium With Product Differentiation
This note gives a method of determining the long-run equilibrium output of a firm operating under imperfect competition that differs from standard methods of output determination and reveals properties of the equilibrium that standard methods conceal. This method requires a basic cost-effectiveness condition to hold, which leads to a highly elastic demand. If we strengthen that condition a bit, long-run equilibrium under free entry and exit becomes indistinguishable from a long-run equilibrium under perfect competition, even though products are differentiated and the condition given by Rosen for perfect competition with product differentiation fails to hold.
|Keywords||Imperfect Competition, Substitutability, Cost Effectiveness, Firm Size, Excess Capacity.|
|JEL||Production; Capital and Total Factor Productivity; Capacity (jel D24), Oligopoly and Other Forms of Market Imperfection (jel D43), Allocative Efficiency; Cost Benefit Analysis (jel D61)|
|Publisher||Department of Economics|
|Series||Carleton Economic Papers|
|Note||Revised 9 October 2012 and 9 January 2017; 13 July 2017 formerly titled “Product Differentiation, Firm Size, and Entry”|
Carson, Richard L. (2004). A Competitive Equilibrium With Product Differentiation (No. CEP 04-18). Carleton Economic Papers. Department of Economics.