Monopolistic Competition, Increasing Returns and International Coordination of Entry Policy

Abstract

This paper presents a new model of monopolistic competition in which firms produce differentiated products under decreasing costs. This model is used to confirm and illustrate the limitations of the excess entry hypothesis, well known in the literature on industrial organization. The validity of the theorem is limited in the sense that it fails to hold in the present model if the properly defined degree of love for variety is sufficiently large. The model is extended to allow for intraindustry trade and to examine the conditions for gains (or losses) from trade in a two‐country framework. It is shown how the degree of love for variety affects them. The significance and nature of international coordination of competition policy in the present setting is considered. The degree of love for variety is again shown to be of crucial importance in the characterization of the optimal policy coordination.