Monopolistic Competition and Multiproduct Brand Names

The excess-capacity theorem pertaining to monopolistic competition implies a trade-off between variety and cost. This article shows that the excess-capacity theorem does not hold if firms market several products under a single brand name and if marketing efforts spill over from one product to another. The argument of the article requires that selling efforts not be prejudged to be wasteful or redundant, a position adopted and defended in Harold Demsetz's writing on monopolistic competition. Within that framework, the article constructs a counterexample to the excess-capacity theorem. Copyright 1989 by the University of Chicago.