The Logit Model of Monopolistic Competitions

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, we find that monopolistic competition results in too few firms and thus too few brands from the viewpoint of consumers. This result supports the findings of other models with symmetrically differentiated brands.