Oligopolistic Competition, Technology Innovation, and Multiproduct Firms

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The monopolistic competition model is suitable for markets with a large group of relatively small firms. However, it hardly describes oligopoly markets where several multi-national companies dominate the markets and each giant firm produces a large number of products. Such a market structure would require a full-fledged oligopolistic competition model, which is the purpose of this paper. We investigate firms' innovative behavior in differentiated oligopolistic markets using a compound CES utility function. In contrast to other oligopolistic competition models with multiproduct firms, the model in this paper has the following characteristics: (1) the elasticity of substitution across firm's own products and the elasticity of substitution across different firms are allowed to differ; (2) the product managers of the same firm behave cooperatively rather than independently; (3) the number of firms is determined by a free-entry condition and so is endogenous rather than exogenous. In a symmetric equilibrium, we show that the oligopolist tends to charge less when the market is less differentiated and more when the oligopolist has more market power. An increase in the level of proliferation raises the firm's market power. It is shown that the level of proliferation has positive effect on the firm's own prices and negative effect on other firms' prices. If the elasticity of substitution across firm's own products increases, it is shown that the firm's proliferation level decreases and the number of firms in the market increases. On the contrary, if the elasticity of substitution across different firms increases, the firm's proliferation level increases and the number of firms in the market decreases. The number of products produced by each firm increases as the marginal proliferation cost decreases and tends to infinity as the marginal proliferation cost is vanishing.