One thing I’m interested in is the theoretical economics of entertainment media. For instance, we know that people have a wide variety of tastes in movies, but movie producers aren’t necessarily interested in catering to everyone’s tastes, they’re just interested in maximizing profit. You can imagine situations where this would lead most movie producers to cater to the most popular tastes, and to ignore fringe tastes.
Economists would describe this system as a kind of monopolistic competition. The problem is, monopolistic competition is super complicated and dependent on details, and I for one don’t understand it. So in order to better understand monopolistic competition, I want to build a toy model–the very simplest model that vaguely resembles monopolistic competition. The goal is not to build a realistic model, it’s more of a conversation piece.
Disclaimer: I have no education in economics, I’m more of a game theory guy.
Movies, democracies, and food trucks
Monopolistic competition is a system where different firms produce goods that are differentiated from each other. To make the very simplest model, we’re going to imagine that goods are differentiated from each other along only a single axis. For example, suppose that each movie falls along a one-dimensional spectrum from “drama” to “comedy”. And where a movie falls along this spectrum is the only thing that could differentiate it from other movies. Some viewers prefer comedies, and some prefer dramas, and some prefer dramedies.