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Continuous spatial monopolistic competition: matching goods with consumers

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Our novel approach enriches the general additive monopolistic competition model with a space of product characteristics: consumers’ “ideal varieties”. This paper bridges two traditions in modelling markets with horizontal product differentiation: the Hotelling’s (Econ J 39(153):41–57, 1929) “address economy” and Chamberlinian Dixit–Stiglitz monopolistic competition. Unlike Hotelling, our partially localised competition involves intersecting zones of service among producers. When population grows, increasing/decreasing elasticity of elementary utility governs increasing/decreasing prices. Increasing market size induces an increase in the firm density, but with the presence of transport cost, the firm’s range of service decreases, consumers concentrate their consumption closer to their ideals, and there are savings in transport costs. Thereby, finer matching among buyers/sellers becomes the important welfare benefit from a thicker market. That is, our model sets a finer matching of goods to tastes as a new source of gains rather than variety being the only reason for gains. Free entry remains socially excessive, under natural preferences.

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Correspondence to Maxim Goryunov.

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The authors express gratitude for comments and suggestions to Michal Fabinger, Andrea Galeotti, Jakub Steiner and to the participants of 5-th Conference “Industrial Organization and Spatial Economics”—2016, especially Kristian Behrens, Svetlana Demidova, Gabriel Felbermayr, Yasusada Murata, Mathieu Parenti and Alexander Tarasov. Support from the Basic Research Program of the HSE University is gratefully acknowledged.

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Goryunov, M., Kokovin, S. & Tabuchi, T. Continuous spatial monopolistic competition: matching goods with consumers. Econ Theory 74, 793–832 (2022).

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