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 sustitutes 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.
Bibliographical noteFunding Information:
* Financial Assistance from the National Science Foundation in the form of Grant SES-8308446 and from the J. L. Kellogg Graduate School of Management in the form of a Xerox research chair are gratefully acknowledged. I have benefited greatly from many conversations with many people concerning the paper. Foremost among them are A. Mas-Colell, V. V. Chari. J. Ostroy, and L. Simon In addition I have benefited from the comments of an anonymous referee and the editors of this journal. Of course, I alone am responsible for any errors.