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The Logit Model of Monopolistic Competition: Brand Diversity

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  • Besanko, David
  • Perry, Martin K
  • Spady, Richard H

Abstract

One of the important issues in the literature on monopolistic competition concerns whether the free entry equilibrium will provide sufficient variety of differentiated brands. This paper examines variety issue using the logit choice model to capture brand differentiation. The consumption value of each brand is drawn from the extreme value distribution, and the consumer then purchases the brand with the highest value. With the resulting demand structure, the authors' find that monopolistic competition results in two few firms and, thus, too few brands from the viewpoint of consumers. This result supports the findings of other models with symmetrically differentiated brands. Copyright 1990 by Blackwell Publishing Ltd.

Suggested Citation

  • Besanko, David & Perry, Martin K & Spady, Richard H, 1990. "The Logit Model of Monopolistic Competition: Brand Diversity," Journal of Industrial Economics, Wiley Blackwell, vol. 38(4), pages 397-415, June.
    • Handle: RePEc:bla:jindec:v:38:y:1990:i:4:p:397-415
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    Cited by:

    1. James D. Reitzes & Glenn A. Woroch, 2008. "Competition for exclusive customers: comparing equilibrium and welfare under one‐part and two‐part pricing," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(3), pages 1046-1086, August.
    2. Walter Beckert, 2015. "Choice in the Presence of Experts," Birkbeck Working Papers in Economics and Finance 1503, Birkbeck, Department of Economics, Mathematics & Statistics.
    3. Jean-Pierre H. Dubé, 2018. "Microeconometric Models of Consumer Demand," NBER Working Papers 25215, National Bureau of Economic Research, Inc.
    4. Beckert, Walter, 2018. "Choice in the presence of experts: The role of general practitioners in patients’ hospital choice," Journal of Health Economics, Elsevier, vol. 60(C), pages 98-117.
    5. Mesak, Hani I. & Bari, Abdullahel & Blackstock, Rob, 2016. "On the robustness and strategic implications of a parsimonious advertising – inventory competitive model with extensions to pricing competition," International Journal of Production Economics, Elsevier, vol. 180(C), pages 38-47.
    6. Ramon Caminal & Lluís M. Granero, 2012. "Multi‐product Firms and Product Variety," Economica, London School of Economics and Political Science, vol. 79(314), pages 303-328, April.
    7. Light, Bar & Weintraub, Gabriel, 2018. "Mean Field Equilibrium: Uniqueness, Existence, and Comparative Statics," Research Papers 3731, Stanford University, Graduate School of Business.
    8. C. Robert Clark, 2007. "Advertising Restrictions and Competition in the Children’s Breakfast Cereal Industry," Journal of Law and Economics, University of Chicago Press, vol. 50(4), pages 757-780.
    9. Anderson, Simon P & de Palma, Andre, 1992. "Multiproduct Firms: A Nested Logit Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 40(3), pages 261-276, September.
    10. Llanes, Gastón & de Elejalde, Ramiro, 2013. "Industry equilibrium with open-source and proprietary firms," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 36-49.
    11. Paolo Bertoletti & Federico Etro, 2024. "Insufficient Entry in Monopolistic Competition," Working Papers 543, University of Milano-Bicocca, Department of Economics.
    12. Adlakha, Sachin & Johari, Ramesh & Weintraub, Gabriel Y., 2015. "Equilibria of dynamic games with many players: Existence, approximation, and market structure," Journal of Economic Theory, Elsevier, vol. 156(C), pages 269-316.
    13. Vivek Farias & Bar Ifrach & Gabriel Weintraub, 2012. "A Framework for Dynamic Oligopoly in Concentrated Industries," 2012 Meeting Papers 505, Society for Economic Dynamics.
    14. Yaroslav Kryukov & Ulrich Doraszelski & David Besanko, 2015. "Is Dynamic Competition Socially Beneficial? The Case of Price as Investment," 2015 Meeting Papers 296, Society for Economic Dynamics.
    15. Duarte Brito & Margarida Catalão-Lopes, 2023. "Profit raising entry under mixed behavior," Journal of Economics, Springer, vol. 138(1), pages 51-72, January.
    16. Christopher Coyne & Justin Isaacs & Jeremy Schwartz, 2010. "Entrepreneurship and the taste for discrimination," Journal of Evolutionary Economics, Springer, vol. 20(4), pages 609-627, August.
    17. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Unilateral Effects," IDEI Working Papers 222, Institut d'Économie Industrielle (IDEI), Toulouse.
    18. Weintraub, Gabriel Y. & Benkard, C. Lanier & Van Roy, Benjamin, 2011. "Industry dynamics: Foundations for models with an infinite number of firms," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1965-1994, September.
    19. Yonatan Gur & Lijian Lu & Gabriel Y. Weintraub, 2017. "Framework Agreements in Procurement: An Auction Model and Design Recommendations," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 586-603, October.
    20. Nicholas Economides & Steven S. Wildman, 1995. "Monopolistic Competition with Two-Part Tariffs," Working Papers 95-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    21. Fosgerau, Mogens & Lindberg, Per Olov & Mattsson, Lars-Göran & Weibull, Jörgen, 2018. "A note on the invariance of the distribution of the maximum," Journal of Mathematical Economics, Elsevier, vol. 74(C), pages 56-61.
    22. Suman Basuroy & Dung Nguyen, 1998. "Multinomial Logit Market Share Models: Equilibrium Characteristics and Strategic Implications," Management Science, INFORMS, vol. 44(10), pages 1396-1408, October.
    23. Torshizi Mohammad & Fulton Murray E. & Gray Richard S., 2018. "Non-Linear Demand in a Linear Town," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 16(2), pages 1-12, November.
    24. Masaaki Kijima & Kei-Ichiro Nakagawa & Takashi Namatame, 2000. "Competitive Price Equilibrium with Consumer Reservation Utility," Computational and Mathematical Organization Theory, Springer, vol. 6(1), pages 7-27, May.

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