Efficient demands in a multi-product monopoly

Abstract

This paper characterizes the efficient market demands among those with a fixed surplus level in a multi-product monopoly, where the monopolist is able to produce a continuum of quality-differentiated products with a cost function that is convex in quality. We show that any efficient market demand must be affine-unit-elastic. This further reduces the problem of characterizing the efficient frontier to a finite dimensional constraint optimization problem. From this characterization, it follows that deadweight losses are positive even under efficient demands; that both consumer surplus and total welfare are nonmonotonic in cost; and that the monopolist sells at most two distinct quality levels under any efficient market demand.