MONOPOLISTIC COMPETITION WITH ENDOGENOUS SPECIALIZATION

In the familiar spatial model of monopolistic competition on the circl e, a product is identified by a single locational characteristic. repr esenting its brand or variety. The ability of a variety to compete wit h other varieties a given distance away (its ''specialization'' as qua ntified by transportation losses or how rapidly the ''melting iceberg' ' melts) is exogenously given in the standard model. Here, specializat ion is a choice variable selected by the firm. A monopolistically comp etitive general equilibrium is derived, where the degree of specializa tion is endogenously determined along with other variables. Implicatio ns are noted. The central contribution is to show that the effect of e ndogenizing specialization is to make the Hotelling-Lancaster Chamberl in model of monopolistic competition isomorphic to the analytically mu ch more tractable Dixit-Stiglitz Ethier formulation, without sacrifici ng the appealing concept of product ''distance''.