The paper by Michael Spence examines the effects of fixed costs and monopolistic competition on product selection and characteristics in interacting markets. It argues that fixed costs contribute to imperfectly competitive market structures and non-competitive pricing, but also restrict the number and variety of products that can be supplied. The principal criterion for product choice in a market system is profitability, with products that survive being those that generate sufficient revenues to cover fixed and variable costs. Spence notes that revenues may not accurately reflect social benefits, as they do not capture consumer surplus. This suggests that product choice in the market context may not be optimal, leading to potential market failures. The paper explores the implications of this type of market failure in the setting of multiple firms and interacting products. Spence discusses how price discrimination can eliminate the welfare aspects of the product choice problem by allowing firms to maximize total surplus. He also argues that monopolistic competition tends to supply too few complementary products but may supply too many substitute products. The paper further shows that monopolistic competition implicitly maximizes a function that is not the total surplus, leading to qualitative differences between market outcomes and welfare optima. Spence concludes that monopolistic competition is particularly unsuitable for complementary products, as it fails to capture the positive interactions between products. He also notes that the market tends to select against products with low price elasticity of demand and high fixed costs. The paper highlights the biases in product choice under monopolistic competition and the implications for the number and variety of products in the market.The paper by Michael Spence examines the effects of fixed costs and monopolistic competition on product selection and characteristics in interacting markets. It argues that fixed costs contribute to imperfectly competitive market structures and non-competitive pricing, but also restrict the number and variety of products that can be supplied. The principal criterion for product choice in a market system is profitability, with products that survive being those that generate sufficient revenues to cover fixed and variable costs. Spence notes that revenues may not accurately reflect social benefits, as they do not capture consumer surplus. This suggests that product choice in the market context may not be optimal, leading to potential market failures. The paper explores the implications of this type of market failure in the setting of multiple firms and interacting products. Spence discusses how price discrimination can eliminate the welfare aspects of the product choice problem by allowing firms to maximize total surplus. He also argues that monopolistic competition tends to supply too few complementary products but may supply too many substitute products. The paper further shows that monopolistic competition implicitly maximizes a function that is not the total surplus, leading to qualitative differences between market outcomes and welfare optima. Spence concludes that monopolistic competition is particularly unsuitable for complementary products, as it fails to capture the positive interactions between products. He also notes that the market tends to select against products with low price elasticity of demand and high fixed costs. The paper highlights the biases in product choice under monopolistic competition and the implications for the number and variety of products in the market.