Trade, Firm Size, and Product Variety under Monopolistic Competition

Monopolistic competition is used to examine rationalization behavior in response to market integration. A particular second-order condition on demand functions for differentiated products must be satisfied to generate an increase in firm size with an associated decline in equilibrium price when market size increases. For identical products, the firm size increase is guaranteed. The number of firms increases less than it does in proportion to market size for identical products, but may increase more than in proportion to market size for differentiated products. The latter results implies that market integration need not lead to exit of firms.