| Sumario: | One of the functions of the market system is to select the commodities that are produced and sold. This process is variously referred to as product differentiation, product selection, and monopolistic competition. Product differentiation involves a set of real economic choices because, there are increasing returns or declining average costs in the development, production, marketing and distribution activities of firms. The full range of possible, products is neither feasible nor desirable in the presence of increasing returns to scale. Product differentiation is also an important component of imperfectly competitive strategic interaction, both static and dynamic. Some would argue it is, in many industries, the most important part of the dynamics of competition. The main purpose of the article is to discuss some of what has recently been learned about the welfare aspects of product differentiation and monopolistic competition in a market system. A product's marginal contribution to surplus is the additional -gross surplus it adds, minus the cost of producing it. That in turn is the area under the inverse demand function minus the costs of productions.
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