Monopolistic Competition and Optimum
Product Diversity
By AVINASH K. DIXIT AND JOSEPH E. STIGLITZ*
The basic issue concerning production in
welfare economics is whether a market solution
will yield the socially optimum kinds
and quantities of commodities. It is well
known that problems can arise for three
broad reasons: distributive justice; external
effects; and scale economies. This paper is
concerned with the last of these.