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Functional Differentiation

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Author Info
Sällström, Susanna
Abstract

Models of product differentiation typically assume a demand for variety. This paper derives the demand for variety in a model where a representative consumer chooses how many specialised varieties to purchase for the pursuit of different activities. In contrast with previous models this generates a demand for variety that is price and income elastic. In applications to monopoly and duopoly I find that whilst a duopoly will choose efficient characteristics it will offer too many specialised varieties, whereas a monopoly will either offer excessively specialised varieties or too few specialised varieties on the assumption of no fixed costs of variety.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7187.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7187

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Related research
Keywords: general purpose goods; product differentiation; specialised goods; variety;

Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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    Other versions:
  16. von Ungern-Sternberg, Thomas, 1988. "Monopolistic Competition and General Purpose Products," Review of Economic Studies, Blackwell Publishing, vol. 55(2), pages 231-46, April. [Downloadable!] (restricted)
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    Other versions:
  18. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn. [Downloadable!] (restricted)
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