This book presents economic theories that seek to explain the prevalence of differentiated products in market economies. It uses these theories to derive market equilibria and to compare these to social optima for both horizontally and vertically differentiated products. The implications of product differentiation for market structure and power, strategic entry deterrence and international trade are all examined.

This paper provides a framework to understand how market size affects firms' investments in product differentiation in a model of monopolistic competition. The theory proposes that consumers' love of variety makes them more sensitive to product differentiation efforts by firms, which leads to more differentiated products in larger markets. The framework also predicts an inverted -shaped effect of trade liberalization on product differentiation, with trade liberalization leading to more differentiated products when starting from autarky but then leading to less differentiated products as the countries approach free trade.