seemed to suggest that modern market economies were systematically
inefficient. In time, however, it was generally accepted that the excess
capacity of monopolistic competition does not necessarily indicate a
waste of resources because benefits accrue to consumers who can choose
among the variety of products.
Saying that consumers value variety is not saying that each consumer
necessarily values variety. You might like only one of the many brands of
toothpaste and be better off if only that one brand were produced and
sold at a lower price. But other consumers would prefer one of the other
brands. Thus, it is the differences in preferences across many consumers
that give rise to the social value of variety, and the cost of achieving that
greater variety is the higher price per unit that consumers pay.
From society’s point of view, there is a tradeoff between producing more brands to satisfy
diverse preferences and producing fewer brands at a lower cost per unit.