Optimal Product Proliferation in Monopoly: A Dynamic Analysis

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 equilibtium, 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.