The paper by Michael Spence, titled "Product Selection, Fixed Costs, and Monopolistic Competition," investigates the effects of fixed costs and monopolistic competition on product selection and characteristics in interacting markets. Fixed costs, which are incurred regardless of output volume, can lead to imperfectly competitive market structures and non-competitive pricing. These costs restrict the number and variety of products that can be supplied, leading to a choice of products based on profitability. The paper argues that this choice may not be optimal from a social welfare perspective, as revenues do not accurately reflect consumer surplus. Spence's analysis is based on a comparison of market outcomes with welfare optima, defined as points where consumer and producer surplus are maximized. The paper explores the implications of market failures in multiple firms and interacting products, focusing on the role of price discrimination and the impact of complementary and substitute products. Key findings include: 1. **Price Discrimination**: If sellers can price discriminate, the Nash equilibria in the industry are local maxima of total surplus, suggesting that the product choice problem is caused by the incompleteness of prices and profits as signals. 2. **Complementary Products**: Monopolistic competition tends to supply too few complementary products, as firms hold back output and raise prices, reducing demand for other complementary products. 3. **Substitute Products**: The analysis of substitute products reveals biases against products with low elasticity of demand and high fixed costs. The market tends to produce fewer socially valuable products that cannot cover their costs. 4. **Generalized CES Case**: For a class of demand functions, the market equilibrium often has fewer products than the optimum, leading to a bias against products with steeply sloped inverse demand functions. The paper concludes by suggesting that the market system does not automatically produce the right products and that fixed costs can lead to multiple market equilibria, with potential welfare differences among them.The paper by Michael Spence, titled "Product Selection, Fixed Costs, and Monopolistic Competition," investigates the effects of fixed costs and monopolistic competition on product selection and characteristics in interacting markets. Fixed costs, which are incurred regardless of output volume, can lead to imperfectly competitive market structures and non-competitive pricing. These costs restrict the number and variety of products that can be supplied, leading to a choice of products based on profitability. The paper argues that this choice may not be optimal from a social welfare perspective, as revenues do not accurately reflect consumer surplus. Spence's analysis is based on a comparison of market outcomes with welfare optima, defined as points where consumer and producer surplus are maximized. The paper explores the implications of market failures in multiple firms and interacting products, focusing on the role of price discrimination and the impact of complementary and substitute products. Key findings include: 1. **Price Discrimination**: If sellers can price discriminate, the Nash equilibria in the industry are local maxima of total surplus, suggesting that the product choice problem is caused by the incompleteness of prices and profits as signals. 2. **Complementary Products**: Monopolistic competition tends to supply too few complementary products, as firms hold back output and raise prices, reducing demand for other complementary products. 3. **Substitute Products**: The analysis of substitute products reveals biases against products with low elasticity of demand and high fixed costs. The market tends to produce fewer socially valuable products that cannot cover their costs. 4. **Generalized CES Case**: For a class of demand functions, the market equilibrium often has fewer products than the optimum, leading to a bias against products with steeply sloped inverse demand functions. The paper concludes by suggesting that the market system does not automatically produce the right products and that fixed costs can lead to multiple market equilibria, with potential welfare differences among them.