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Monopolistic Competition with Outside Goods

Steven C. Salop
The Bell Journal of Economics
Vol. 10, No. 1 (Spring, 1979), pp. 141-156
Published by: RAND Corporation
DOI: 10.2307/3003323
Stable URL: http://www.jstor.org/stable/3003323
Page Count: 16
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Monopolistic Competition with Outside Goods
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Abstract

The Chamberlinian monopolistically competitive equilibrium has been explored and extended in a number of recent papers. These analyses have paid only cursory attention to the existence of an industry outside the Chamberlinian group. In this article I analyze a model of spatial competition in which a second commodity is explicitly treated. In this two-industry economy, a zero-profit equilibrium with symmetrically located firms may exhibit rather strange properties. First, demand curves are kinked, although firms make "Nash" conjectures. If equilibrium lies at the kink, the effects of parameter changes are perverse. In the short run, prices are rigid in the face of small cost changes. In the long run, increases in costs lower equilibrium prices. Increases in market size raise prices. The welfare properties are also perverse at a kinked equilibrium.

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