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A difficulty with the address models of product differentiation

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  • Martin Peitz

    ()
    (Departamento Fundamentos del AnaÂlisis EconoÕmico, University of Alicante, E-03071 Alicante, SPAIN)

Abstract

In models of product differentiation and location models it is implicitly assumed that consumers can afford to buy the differentiated goods in the market. I show that with income heterogeneity there are severe existence problems of a price equilibrium in models of horizontal product differentiation with unit demand because some consumers are income-constrained. The result generalizes to other models of product differentiation, search, and switching costs. I present an alternative specification of variable individual demand in which this kind of existence problem cannot arise.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 14 (1999)
Issue (Month): 3 ()
Pages: 717-727

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Handle: RePEc:spr:joecth:v:14:y:1999:i:3:p:717-727

Note: Received: October 17, 1997; revised version: February 20, 1998
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Related research

Keywords: Product differentiation; Unit demand; Heterogeneous income; Discrete choice.;

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References

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  1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  2. Economides, Nicholas, 1984. "The principle of minimum differentiation revisited," European Economic Review, Elsevier, vol. 24(3), pages 345-368, April.
  3. Martin Peitz, 1996. "Differentiated bertrand duopoly with variable demand," Working Papers. Serie AD 1996-18, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. CREMER, Helmuth & THISSE, Jacques-François, . "Location models of horizontal differentiation: a special case of vertical differentiation models," CORE Discussion Papers RP -931, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
  6. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  7. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
  8. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Imperfect Competition: On The Existence Of Equilibrium," Discussion Papers 1989_30, Columbia University, Department of Economics.
  9. Martin Peitz, 1998. "- Two-Stage Models Of Product Differentiation With Unit-Elastic Demand," Working Papers. Serie AD 1998-18, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  10. Bockem, Sabine, 1994. "A Generalized Model of Horizontal Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 287-98, September.
  11. Peitz, Martin, 1995. "Utility maximization in models of discrete choice," Economics Letters, Elsevier, vol. 49(1), pages 91-94, July.
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Cited by:
  1. Peitz, Martin, 2000. "Aggregation in a Model of Price Competition," Journal of Economic Theory, Elsevier, vol. 90(1), pages 1-38, January.
  2. Pia Weiss, 2002. "Product and Process Innovations in a Horizontally Differentiated Product Market," Industrial Organization 0201005, EconWPA.

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