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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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Author Info
Sällström Matthews, S.E.
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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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
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Handle: RePEc:cam:camdae:0727

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

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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 - - - 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

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  1. 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. [Downloadable!] (restricted)
  2. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Blackwell Publishing, vol. 38(3), pages 283-98, March. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Blackwell Publishing, vol. 43(2), pages 217-35, June. [Downloadable!] (restricted)
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  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. [Downloadable!]
  8. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-59, September. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. White, Lawrence J, 1977. "Market Structure and Product Varieties," American Economic Review, American Economic Association, vol. 67(2), pages 179-82, March. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. Anderson, Simon P & de Palma, Andre & Thisse, Jacques-Francois, 1989. "Demand for Differentiated Products, Discrete Choice Models, and the Characteristics Approach," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 21-35, January. [Downloadable!] (restricted)
  14. Gordon, Robert J & Griliches, Zvi, 1997. "Quality Change and New Products," American Economic Review, American Economic Association, vol. 87(2), pages 84-88, May. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
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