EVER since the publication of Chamberlin's Theory of Monopolistic Competition [6], economists have known that how well a market economy solves the three-way trade-off among product variety, economies of scale, and purity of competition critically affects the level of economic welfare. Following a long period of neglect, there has recently been an explosion of work on the theory of optimal product variety. Although unsettled questions remain, the theory reveals that whether monopolistic competition yields the welfaremaximizing amount of product variety, too little, or too much, depends upon the relationships among several potentially observable variables. Except for the rather special cases of television programming and service competition among publicly regulated airlines,1 there has been little effort to apply the theory to real-world market situations. This paper attempts to extend the set of applications to a situation in which the visible hand of regulation was largely absent. The focus is the US ready-to-eat (RTE) breakfast cereal industry, which is the subject of a major antitrust case brought by the Federal Trade Commission.2 The FTC's complaint alleges that leading manufacturers Kellogg, General Mills, Post (i.e. General Foods), and Quaker,3 accounting for approximately go% of RTE cereal sales during the late I96os, collectively monopolized the industry and engaged in diverse monopolistic practices. One charge is that the four respondents deterred new entry by proliferating product varieties, thereby leaving insufficient room for viable newcomers.4 In other words, they pre-empted the entry of what otherwise would have been new monopolistic competitors and thereby prevented the emergence of a more atomistic market structure. The FTC did not address the question of whether product proliferation was carried beyond the point at which some plausible index of social welfare was maximized. To take