The different consumption functions of products and product differentiation

This paper develops a monopolistic competition model to study the characteristics of products, such as quality improvement and product diversity (function-specialization and individualization), and the division of labor in production. Different from the ordinary economic model, our utility function includes these characteristics and reveals economies of function-specialization and individualization. Moreover, our production function includes these characteristics and reveals economies of vertical specialization and function-specialization. Through comparative static analysis, we find the optimal characteristics and their correlations with population, transaction costs, management efficiency and production technology, etc.