MONOPOLISTIC COMPETITION WITH ENDOGENOUS SPECIALIZATION

In the familiar spatial model of monopolistic competition on the circle, a product is identified by a single locational characteristic. representing its brand or variety. The ability of a variety to compete with other varieties a given distance away (its ''specialization'' as quantified by transportation losses or how rapidly the ''melting iceberg'' melts) is exogenously given in the standard model. Here, specialization is a choice variable selected by the firm. A monopolistically competitive general equilibrium is derived, where the degree of specialization is endogenously determined along with other variables. Implications are noted. The central contribution is to show that the effect of endogenizing specialization is to make the Hotelling-Lancaster Chamberlin model of monopolistic competition isomorphic to the analytically much more tractable Dixit-Stiglitz Ethier formulation, without sacrificing the appealing concept of product ''distance''.