MONOPOLISTIC COMPETITION, MULTIPRODUCT FIRMS AND PRODUCT DIVERSITY*

This paper has two objectives. First, it presents a linear model of monopolistic competition in which weak strategic interactions among single‐product firms are allowed for. Second, it extends this model to the case of multiproduct firms, thus showing how product diversity is affected by strong strategic interactions among oligopolists. In our setting, monopolistic competition with single‐product firms is a good approximation of oligopolistic competition with multiproduct firms either when varieties are sufficiently differentiated or when scope economies are low.