Equilibrium existence and optimality are analyzed in a market for products differentiated by their variety. A game of three stages is analyzed. Firms enter in the first stage, choose varieties in the second stage, and choose prices in the third stage. The existence of subgame-perfect equilibria is established. At equilibrium products are symmetrically located in the space of characteristics and are offered at equal prices. The surplus maximizing solution is characterized, and it is shown that surplus maximizing product diversity is lower than the equilibrium one.

Journal of Economic Literature Classification Numbers: 022, 611, 615, 933

Published in Journal of Economic Theory, vol. 47, no. 1, pp. 178-194, (February 1989).

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