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Product Varieties in a Quality-Differentiated Goods Monopoly

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This paper analyzes market versus optimal product varieties in a vertically differentiated goods monopoly. Four results are obtained. First, compared to the first- or second-best optimum, product varieties are always undersupplied by a monopolist. Second, the quality range under a monopoly is smaller than that under the first- or second-best optimum. Third, the monopolist distorts the lowest quality upward while distorting the highest quality downward. Finally, a fixed-cost subsidy can lead to a second-best outcome where a social planner determines the number of product varieties and the corresponding qualities, and the monopolist decides the prices. (JEL: L12, D42, L52)
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Keywords: first-best (second-best) optimum; monopoly; product varieties; quality distortion; variable-cost (fixed-cost) subsidy

Appeared or available online: July 9, 2018

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