OLIGOPOLISTIC COMPETITION AND THE OPTIMAL PROVISION OF PRODUCTS

This paper considers the theory of market versus optimal product diver sity in the light of two recent advances in oligopoly theory. The firs t is the development of discrete choice models to describe heterogeneo us consumer tastes, and the application of such models to oligopolisti c competition. The second advance is the proof that logconcavity of th e consumer taste density guarantees the existence of a price equilibri um. We analyze an oligopoly model with price competition and free entr y, taking explicit account of the integer constraint. Under the Chambe rlinian symmetry assumption (that tastes are i.i.d.), we first show th at logconcavity of the taste density implies there is excessive market provision of variety when each consumer buys one unit of the product from one of the firms. We then show that this result extends to price- sensitive individual demands by proving that the equilibrium number of firms is at least as great as that which would be provided at the sec ond-best social optimum subject to a zero-profit constraint for firms. Our results call into question previous findings for representative c onsumer models that left open the possibility of insufficient product diversity.