Oligopolistic Competition and the Optimal Provision of Products.

This paper reconsiders the theory of market versus optimal product diversity using a discrete choice approach to product differentiation. The authors analyze oligopoly with price competition and free entry with integer firm numbers. Under the Chamberlinian symmetry assumption, they show that log-concavity of the taste density function implies excessive market provision of diversity when each consumer buys one unit. This result is extended to price-sensitive individual demands by proving that the equilibrium number of firms exceeds that provided at the second-best optimum subject to zero profits. Copyright 1995 by The Econometric Society.