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.
Highlights
IntroductionAn elementary result in microeconomics is that, for a market where firms produce a homogeneous good at constant, symmetric marginal cost, monopoly leads to higher prices and a less socially desirable outcome than perfect competition amongst a large number of (atomistic) firms
In a horizontally differentiated goods market, where consumers face heterogeneous costs of entering the market and exhibit a taste for variety over the continuum of substitute goods, lowering the general market price level leads to increased consumer entry—the market expansion effect
An elementary result in microeconomics is that, for a market where firms produce a homogeneous good at constant, symmetric marginal cost, monopoly leads to higher prices and a less socially desirable outcome than perfect competition amongst a large number of firms
Summary
An elementary result in microeconomics is that, for a market where firms produce a homogeneous good at constant, symmetric marginal cost, monopoly leads to higher prices and a less socially desirable outcome than perfect competition amongst a large number of (atomistic) firms. In the terminology of [3], the market is a platform where consumers gain access to a variety of products and the compareson that follows in this paper is between open integrated platform ownership (atomistic competition) and monopoly integrated platform ownership The latter is not studied in [3]—see p. Chen and Riordan [8] find that a multiproduct monopolist will set a higher price than two competing firms when it sells both of the goods that are sold by the duopolists to consumers who want both goods It is the internalizing of the effect of one product on demand for the other that generates the result.
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