Welfare, competition, specialization and growth

In this paper we consider a model of horizontal differentiation with a quite general production function and derive the closed form solutions for the level of the variables in the decentralized economy and in the social planner case. This enables us to analyze how consumers’ welfare varies in terms of the degree of competition and the degree of returns to specialization. We find that welfare is increasing in the degree of returns to specialization both in the market economy and in the centralized economy and the decentralized economy's welfare is a bell-shaped function of the degree of competition.

► We solve in closed form a general model of horizontal differentiation.
► We compute the level of welfare in the market and centralized economies.
► An increase in the returns to specialization has always a positive effect on welfare.
► The decentralized economy's welfare is a bell-shaped function of competition.