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Multi-Purpose Consumption and Functional Differentiation: Why has the Vibrant Galleria replaced the Good Old Fashioned Department Store?

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  • Sällström Matthews, S.E.
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    Abstract

    A very striking change in product selection over the last century has been the increased degree of specialisation of durable goods. To analyse these changes this paper introduces a new form of product differentiation called functional. It is shown that when a homogeneous population demands multiple locations (rather than consumers being heterogeneous) several standard results are reversed. A monopoly has an incentive to offer excessively specialised goods and delay innovation. It is in a duopoly that product characteristics will be efficient. Entry of a third firm will be more profitable in the fringes. Furthermore entry results in too much variety. Finally, the paper presents a novel argument in favour of bundling.

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    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0727.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0727.

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    Length: 29
    Date of creation: May 2007
    Date of revision:
    Handle: RePEc:cam:camdae:0727

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    Web page: http://www.econ.cam.ac.uk/index.htm

    Related research

    Keywords: entry; innovation; optimum diversity; functional differentiation; bundling;

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    1. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Caves, Richard E, 1984. "Economic Analysis and the Quest for Competitive Advantage," American Economic Review, American Economic Association, vol. 74(2), pages 127-32, May.
    3. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-59, September.
    4. Ingela Alger, 1999. "Consumer Strategies Limiting the Monopolist's Power: Multiple and Joint Purchases," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 736-757, Winter.
    5. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
    6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    7. Simon P. Anderson & Andre de Palma & Jacques-Francois Thisse, 1987. "Demand for Differentiated Products," Discussion Papers 726, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. White, Lawrence J, 1977. "Market Structure and Product Varieties," American Economic Review, American Economic Association, vol. 67(2), pages 179-82, March.
    9. ANDERSON, Simon P. & de PALMA, André & THISSE, Jacques-François, . "Demand for differentiated products, discrete choice models, and the characteristics approach," CORE Discussion Papers RP -824, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Gordon, Robert J & Griliches, Zvi, 1997. "Quality Change and New Products," American Economic Review, American Economic Association, vol. 87(2), pages 84-88, May.
    11. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    12. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
    13. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
    14. Donnenfeld, Shabtai & White, Lawrence J, 1990. "Quality Distortion by a Discriminating Monopolist: Comment," American Economic Review, American Economic Association, vol. 80(4), pages 941-45, September.
    15. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
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