Multi-Purpose Consumption and Functional Differentiation: Why has the Vibrant Galleria replaced the Good Old Fashioned Department Store?
AbstractA 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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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0727.
Date of creation: May 2007
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entry; innovation; optimum diversity; functional differentiation; bundling;
Find related papers by JEL classification:
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-02 (All new papers)
- NEP-COM-2007-06-02 (Industrial Competition)
- NEP-TID-2007-06-02 (Technology & Industrial Dynamics)
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