A Unified Theory of Value: Oligopolistic Competition and Optimum Product Diversity

Abstract

We develop a tractable general equilibrium model of oligopolistic competition that allows for endogenous product differentiation and exhibits various forms of competition, ranging from perfect to monopolistic competition, simultaneously. Our unified framework provides a novel way to integrate industrial organization with other fields, such as macroeconomics and trade. Our key contribution is the introduction of ex-ante heterogeneity, in contrast to the ex-post heterogeneity typically assumed in the literature (Metlitz, 2003). As a result, most firms in our model prefer to engage in face-to-face competition rather than creating their own variety, in contrast to monopolistic models. We characterize the free entry Cournot equilibrium, as well as the efficient and constrained efficient allocations. Our unified approach enables us to generalize existing results, challenge others, and shed new light on several long-standing economic issues, such as the Kaldor-Chamberlin controversy, the competitive effects of trade, and the strengths and weaknesses of monopolistically competitive models.