Product differentiation offers the consumer the opportunity to select commodities closely tailored to his individual preferences. The greater the variety of products offered, the more likely it is that a consumer will find available a commodity with the attributes he finds particularly desirable. But product differentiation generally has certain costs; for example, to change shape or color may involve setup costs in adjusting machinery or in the production of special dyes. Again, if differentiation takes the form of offering a product at a variety of locations, obvious costs are involved in duplicating stock and so forth at each store. The effect of market structure on the degree of product differentiation is examined in this paper within the context of a model related to that used by Hotelling in his classic contribution to location theory [ 51 ; the quantity purchased by each customer depends upon how closely the product is tailored to his individual tastes as well as upon price. After specifying the details of this environment in Section I, we explore how price and the degree of product differentiation depend upon market structure. Sections I1 and 111 contrast the behavior of an isolated monopolist with the way
Economic Inquiry – Wiley
Published: Jun 1, 1970
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