Market Integration and Industrial Specialization on a Monopolistic Competitive Market

This paper examines the relationship between market integration and product diversification in a Chamberlinian model of monopolistic competition. In the first version of the model, production of the firm is organised in activities producing either one or two horizontally differentiated product-variants. The cost functions show both scale and scope economies. Market integration is illustrated by an increase in the market size. For increasing market size, each firm shifts from producing two variants to producing one variant only at a certain threshold value of market size. Passing this threshold value the firm size measured by total output changes discontinuously leaving the effect on firm size ambiguous. For specific specification of the perceived demand of the individual firm hysteresis of the industrial structure may appear in the sense that the threshold value of the market size for shifting from two to one variant production exceeds that of the threshold value of market size of shifting from one to two variants. In the last part of the paper, the model is generalised to a continuum of variants and it is shown that an increase of the market size reduces the number of variants produced by each firm, whereas the hysteresis phenomenon disappears.