Optimal Product Diversity in an Economy with Search Unemployment

Abstract

Optimum product diversity is analysed within a model of monopolistic competition and search unemployment. We amend the Pissarides (2000) search model by Dixit-Stiglitz (1977) preferences. Thus, entrepreneurs do not only have to decide whether to offer a vacancy, but also whether to produce quantities of an established or of a new variety. We derive equilibrium in the decentral case and compare it
to the social optimum. We show that in general variety may be too large or too small. In addition, decentral unemployment rates are not optimal, even when assuming the Hosios (1990) condition to hold.