Optimal Product Proliferation in Monopoly: A Dynamic Analysis

Luca Lambertini


The monopolist’s incentives towards product proliferation are evaluated in an optimal control
model considering three alternative regimes: profit-seeking; social planning; and a
hybrid case with monopoly pricing and a regulator setting product innovation to maximise
welfare. In equilibrium, the profit-seeking firm supplies a socially suboptimal number of
varieties to reduce cannibalisation while the social planner exploits the same effect to satisfy
consumers’ love for variety and decrease the market price of all products. In terms of
the Schumpeter vs Arrow debate on the relationship between market structure and innovation
incentives, the results obtained in this model have a definite Arrovian flavour

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