The efficiency of monopolistically competitive equilibria in large economies: Commodity differentiation with Gross substitutes (Q1821675)

A general model of commodity differentiation is developed using two different approaches to the theory of demand. It is shown that a local version of Bertrand's argument holds under reasonable conditions. If all commodities are substitutes and sunk costs are small, there is never too little commodity differentiation relative to the optimum. Under the same conditions, monopolistically competitive equilibria are approximately perfectly competitive if the optimal collection of commodities is sufficiently rich.