Monopolistic Competition and General Purpose Products

Abstract

Most models of monopolistic competition study the question of the “optimal degree of product differentiation” by looking at the number of firms that will locate in characteristics space. This is somewhat restrictive. The development of “general purpose” products means that the needs of quite heterogenous consumers can be satisfied with the same homogenous product. The private and social incentives to produce “general purpose” products are studied in this paper within the “circular-road-model” of monopolistic competition. The degree of general purposeness of a product is approximated by its per unit distance transport costs. It is shown that there are strong forces leading the market to supply products whose transport costs are excessively low.