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Abstract
Using a simple model of horizontal differentiation, this paper examines the problem of overprovision of product diversity that causes loss of social welfare. We ask if there is a difference arising from market structures, specifically: will duopolistic market yield different outcomes from multiproduct monopoly under the circumstances when the latter would overprovide diversity? Our analysis reveals that there is no difference. Both monopoly and duopoly causes the same amount of welfare loss by offering too much diversity. However, duopoly competition increases consumers' surplus. We will briefly discuss policy implications of our results and also interpretation of the model in terms of electronic commerce and internet-based industries. |
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Keywords Horizontal Differentiation, Multiproduct Monopoly, Entry, Internet Industry |
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